Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The amount of the payment allocated to principal (the actual loan amount) will go up, but the amount you pay in interest will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments for your fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage toward principal. This proportion reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate 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 offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Yamini Patel at (832) 730-2000 to discuss how we can help.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, so they can't go up above a specified amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in one period. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often feature the lowest rates toward the start of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at (832) 730-2000. It's our job to answer these questions and many others, so we're happy to help!