Fixed versus adjustable rate loans

A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate loan will increase very little.

During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage goes to principal. The amount paid toward principal goes up gradually every month.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Capacity Lending, LLC at 469-640-0400 for details.

There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.

Most programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in a given period. Additionally, the great majority of adjustable programs have a "lifetime cap" — this means that your rate can't ever go over the cap percentage.

ARMs usually start at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they can't sell their home or refinance with a lower property value.

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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