Adjustable versus fixed loans
A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. The amount paid toward principal goes up slowly each month.
You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. 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 F&T Mortgage, Inc. NMLS # 168839 (www.nmlsconsumeraccess.org) at 214-300-8756 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they can't go up over a specified amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can increase in a given period. The majority of ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers are unable to sell their home or refinance.
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!