Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment remains the same for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount applied to principal increases up slowly each month.
You can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Abundance Home Mortgage at (512) 335-7800 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in a given period. Most ARMs also cap your rate over the life of the loan.
ARMs usually start at a very low rate that may increase over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to stay in the house longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers cannot 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!