Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide 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 Southwest Funding #841 at (512) 291-6100 to discuss how we can help.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they can't go up over a specific amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in one period. In addition, almost all ARMs feature a "lifetime cap" — this means that your rate can't ever exceed the cap percentage.
ARMs most often have the lowest, most attractive rates at the start. They usually guarantee the lower rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the home longer than the introductory low-rate period. ARMs are risky when property values decrease and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (512) 291-6100. It's our job to answer these questions and many others, so we're happy to help!