Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment over the life of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Capacity Lending, LLC at 469-640-0400 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment can't go above a certain amount in a given year. Most ARMs also cap your interest rate over the life of the loan.
ARMs usually start at a very low rate that may increase over time. 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. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who plan to move before the loan adjusts.
You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 469-640-0400. We answer questions about different types of loans every day.