Adjustable versus fixed rate loans
With a fixed-rate loan, your payment remains the same for the life of the mortgage. The portion of the payment allocated for principal (the amount you borrowed) increases, however, your interest payment will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments for a fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, the majority your payment goes toward interest. The amount paid toward your principal amount goes up slowly every month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency 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 good rate. Call American Mortgage Advisers, Inc at 214-865-7442 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.
The majority of ARMs are capped, so they won't go up over a specific amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment won't increase beyond a certain amount over the course of a given year. Additionally, the great majority of adjustable programs feature a "lifetime cap" — your interest rate can never exceed the cap amount.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to stay in the home for any longer than this initial low-rate period. 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 214-865-7442. We answer questions about different types of loans every day.
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