Adjustable versus fixed rate loans
A fixed-rate loan features the same payment amount for the entire duration of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment goes toward 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 this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Southwest Funding #841 at (512) 291-6100 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARMs feature this cap, which means they won't increase above a specified 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 goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment won't go above a fixed amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the loan adjusts.
You might choose an ARM to take advantage of a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at (512) 291-6100. We answer questions about different types of loans every day.