Fixed versus adjustable loans

With a fixed-rate loan, your payment never changes for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans vary little.

When you first take out a fixed-rate loan, the majority your payment is applied to interest. That reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in at the 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 Capacity Lending, LLC at 469-640-0400 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.

Most programs have a cap that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment won't increase beyond a fixed amount over the course of a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — your interest rate will never exceed the capped percentage.

ARMs usually start at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who will move before the loan adjusts.

Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the home for any longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at 469-640-0400. It's our job to answer these questions and many others, so we're happy to help!

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