Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The amount of the payment that goes to principal (the amount you borrowed) increases, however, the amount you pay in interest will decrease accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on a fixed-rate loan will be very stable.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage toward principal. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), 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, come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they won't go up above a specific amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment can't go above a certain amount in a given year. In addition, the great majority of ARMs have a "lifetime cap" — the interest rate can never go over the cap percentage.
ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who will move before the loan adjusts.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to remain in the house longer than this introductory low-rate period. ARMs are risky if property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at (512) 335-7800. We answer questions about different types of loans every day.