Fixed versus adjustable loans
With a fixed-rate loan, your payment never changes for the entire duration 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 a fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. The amount applied to your principal amount increases up gradually every month.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in at the 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 can assist you in locking a fixed-rate at the best rate currently available. Call Southwest Funding #841 at (512) 291-6100 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they won't increase over a specific amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment can't go above a certain amount in a given year. Most ARMs also cap your rate over the life of the loan.
ARMs usually start out at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the initial lock expires.
You might choose an ARM to get a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at (512) 291-6100. We answer questions about different types of loans every day.