Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment for the entire duration of the loan. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part toward principal. The amount paid toward principal increases up slowly every month.
Borrowers 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 want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call F&T Mortgage, Inc. NMLS # 168839 (www.nmlsconsumeraccess.org) at 214-300-8756 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in a given period. Additionally, the great majority of adjustable programs feature a "lifetime cap" — your rate won't go over the cap amount.
ARMs usually start out at a very low rate that may increase 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 kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the home longer than this initial low-rate period. ARMs are risky when property values go down and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at 214-300-8756. It's our job to answer these questions and many others, so we're happy to help!