Adjustable versus fixed loans

With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The portion of the payment that goes for principal (the loan amount) will go up, but your interest payment will decrease accordingly. The property tax and homeowners insurance will go up over time, but in general, payments on these types of loans don't increase much.

When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. The amount paid toward principal goes up gradually every month.

You might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call 1st Credential Mortgage Inc at (281) 778-0805 to learn more.

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

The majority of Adjustable Rate Mortgages feature this cap, so they can't increase over a specified amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment won't go above a fixed amount in a given year. Additionally, the great majority of ARM programs have a "lifetime cap" — this means that your interest rate can't go over the capped amount.

ARMs most often feature the lowest, most attractive rates at the start of the loan. They guarantee the lower interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for borrowers who expect to move in three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance with a 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!

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