Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
When you first take out a fixed-rate loan, the majority your payment is applied to interest. That reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability 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 Yamini Patel at (832) 730-2000 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 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 above a specified amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in a given period. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs most often have the lowest, most attractive rates at the start of the loan. They provide that interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will move before the loan adjusts.
You might choose an ARM to take advantage of a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (832) 730-2000. We answer questions about different types of loans every day.