Differences between adjustable and fixed loans
A fixed-rate loan features the same payment over the life of your mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part goes to principal. This proportion gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Capacity Lending, LLC at 469-640-0400 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs feature a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't go above a certain amount in a given year. Most ARMs also cap your rate over the life of the loan period.
ARMs most often feature the lowest rates toward the beginning. They guarantee that interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In 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 they adjust. These loans are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs are risky if property values go down and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 469-640-0400. We answer questions about different types of loans every day.