Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the life of your mortgage. The amount allocated for principal (the actual loan amount) will go up, but the amount you pay in interest will decrease in the same amount. The property taxes and homeowners insurance will go up over time, but for the most part, payments on these types of loans vary little.
At the beginning of a a fixed-rate loan, most of your payment is applied to interest. The amount applied to principal increases up slowly each month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call American Mortgage Advisers, Inc at 214-865-7442 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they can't increase above a certain amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment can't go above a certain amount in a given year. In addition, the great majority of ARMs feature a "lifetime cap" — the rate won't exceed the cap amount.
ARMs most often have their lowest, most attractive rates at the start of the loan. They usually guarantee that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down 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 214-865-7442. We answer questions about different types of loans every day.
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