Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment never changes for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Abundance Home Mortgage at (512) 335-7800 for details.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they can't increase above a specified amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't increase beyond a certain amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs usually start at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (512) 335-7800. We answer questions about different types of loans every day.