Fixed versus adjustable loans
With a fixed-rate loan, your payment stays the same for the life of the mortgage. The amount of the payment allocated for your principal (the amount you borrowed) increases, but your interest payment will decrease accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. The amount paid toward principal increases up gradually every month.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Southwest Funding #841 at (512) 291-6100 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment will not go above a fixed amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs most often feature the lowest, most attractive rates at the start of the loan. They usually provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. These loans are best for people who expect to move within three or five years. These types of adjustable rate loans are best for borrowers who will move before the loan adjusts.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the home longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (512) 291-6100. We answer questions about different types of loans every day.