Differences between adjustable and fixed loans
With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for your fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller percentage toward principal. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, 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 are generally adjusted twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they can't go up above a certain amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment can't increase beyond a fixed amount in a given year. The majority of ARMs also cap your 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". In these loans, the introductory rate is fixed 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 usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the home for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot 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.
Do you have a question regarding a mortgage program?