Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount paid toward your principal amount goes up gradually every month.
You might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call F&T Mortgage, Inc. NMLS # 168839 (www.nmlsconsumeraccess.org) at 214-300-8756 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. 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 a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment can't go above a fixed amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan.
ARMs most often feature the lowest, most attractive rates toward the start. They guarantee that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial 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 they adjust. These loans are usually best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values decrease and borrowers cannot sell 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!