Differences between adjustable and fixed rate 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 so might the homeowner's insurance in your monthly payment. For the most part monthly payments for a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. That gradually reverses as the loan ages.
You can 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 wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call Abundance Home Mortgage at (512) 335-7800 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted every six months, based on various indexes.
Most programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs can'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 rate directly, caps the amount that the monthly payment can go up in one period. Plus, the great majority of adjustable programs have a "lifetime cap" — this means that the interest rate won't go over the capped percentage.
ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan on staying in the home longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell their home 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!