Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The amount of the payment allocated for your principal (the amount you borrowed) increases, however, the amount you pay in interest will decrease in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Abundance Home Mortgage at (512) 335-7800 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment won't go above a fixed amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan.
ARMs most often have their lowest rates at the beginning. They usually guarantee the lower rate from a month to ten years. You've likely heard of 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 loans are fixed for a certain number of years (3 or 5), then adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to get a very low initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (512) 335-7800. We answer questions about different types of loans every day.