Adjustable versus fixed rate loans
With a fixed-rate loan, your payment remains the same for the entire duration of your mortgage. The portion allocated for your principal (the actual loan amount) increases, but your interest payment will go down accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go mostly 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 the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Capacity Lending, LLC at 469-640-0400 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs are capped, so they won't go up above a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in one period. Additionally, almost all adjustable programs have a "lifetime cap" — this cap means that the interest rate can never exceed the capped amount.
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. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than the initial low-rate period. ARMs are risky when property values go down and borrowers cannot sell their home or refinance their loan.
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!