Fixed versus adjustable loans
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With a fixed-rate loan, your payment stays the same for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, most of the payment is applied to interest. The amount paid toward principal goes up gradually each month.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Not Your Average Lender at 972-203-9033 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest on ARMs are based on a federal index. Some examples of outside indexes 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. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment will not increase beyond a certain amount in a given year. Almost all ARMs also cap your rate over the life of the loan period.
ARMs most often have their lowest, most attractive rates toward the beginning. They usually provide the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit people who plan to move before the initial lock expires.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the house longer than the introductory low-rate period. ARMs are risky if property values go down and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at 972-203-9033. It's our job to answer these questions and many others, so we're happy to help!