Adjustable versus fixed loans
A fixed-rate loan features a fixed payment amount over the life of your mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments on a fixed-rate mortgage will increase very little.
When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at the 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'd love to 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, as we called them above — come in a great number of varieties. Generally, interest rates for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages feature this cap, which means they can't increase over a specific amount in a given period. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your payment can go up in one period. Additionally, the great majority of ARMs have a "lifetime cap" — this cap means that the rate can't exceed the cap amount.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are often best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers can't 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!