Fixed versus adjustable loans
With a fixed-rate loan, your payment never changes for the life of the loan. The amount of the payment that goes for principal (the actual loan amount) increases, but the amount you pay in interest will decrease in the same amount. The property taxes and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans don't increase much.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage goes to principal. This proportion reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in 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 your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment can't go above a certain amount in a given year. Plus, the great majority of ARMs feature a "lifetime cap" — this cap means that your rate will never exceed the capped amount.
ARMs usually start at a very low rate that usually increases over time. 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 kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. 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. We answer questions about different types of loans every day.