Adjustable versus fixed loans
With a fixed-rate loan, your payment never changes for the life of your loan. The portion that goes for principal (the actual loan amount) goes up, however, the amount you pay in interest will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for a fixed-rate loan will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of the payment is applied to interest. That reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call 1st Credential Mortgage Inc at (281) 778-0805 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages feature this cap, which means they can't go up over a specific amount in a given period. Some ARMs can't adjust more than two percent 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 a given period. Plus, the great majority of ARMs have a "lifetime cap" — this means that the interest rate can't go over the capped percentage.
ARMs most often have the lowest rates toward the beginning of the loan. They guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.
You might choose an ARM to get a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (281) 778-0805. It's our job to answer these questions and many others, so we're happy to help!