Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment amount over the life of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate loan will increase very little.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage toward principal. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call 1st Credential Mortgage Inc at (281) 778-0805 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARMs feature this cap, which means they won't increase above a certain amount in a given period of time. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. Plus, almost all adjustable programs have a "lifetime cap" — this means that the rate can never exceed the capped amount.
ARMs usually start out at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on remaining in the house longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (281) 778-0805. We answer questions about different types of loans every day.