Differences between adjustable and fixed loans
A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate loan, the majority the payment goes toward interest. The amount paid toward your principal amount goes up gradually each month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when 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 provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Abundance Home Mortgage at (512) 335-7800 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages feature this cap, which means they won't increase over a specific amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan.
ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the house for any longer than the initial low-rate period. ARMs are risky if property values go down and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at (512) 335-7800. It's our job to answer these questions and many others, so we're happy to help!