Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The portion of the payment allocated for principal (the amount you borrowed) will go up, however, your interest payment will go down accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Abundance Home Mortgage at (512) 335-7800 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARM programs feature a cap that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in one period. In addition, the great majority of ARMs feature a "lifetime cap" — this means that your interest rate can't exceed the cap percentage.
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". 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 certain number of years (3 or 5), then they adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers can't sell their home or refinance their loan.
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!