Differences between fixed and adjustable loans
With a fixed-rate loan, your payment doesn't change for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans don't increase much.
When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. This proportion gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Southwest Funding #841 at (512) 291-6100 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they can't go up over a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment will not go above a certain amount in a given year. Plus, almost all ARM programs feature a "lifetime cap" — this means that the interest rate can't go over the capped percentage.
ARMs most often feature their lowest, most attractive rates at the beginning. They provide the lower interest rate for an initial period that varies greatly. You may hear people talking 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 loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the home for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (512) 291-6100. We answer questions about different types of loans every day.