Differences between adjustable and fixed loans

A fixed-rate loan features the same payment over the life of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on a fixed-rate mortgage will increase very little.

Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part goes to principal. That gradually reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call 1st Credential Mortgage Inc at (281) 778-0805 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of ARMs are capped, so they can't increase over a specific amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can increase in one period. Almost all ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.

You might choose an ARM to get a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky if property values decrease and borrowers cannot sell or refinance.

Have questions about mortgage loans? Call us at (281) 778-0805. We answer questions about different types of loans every day.

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