Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment never changes for the life of the 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, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion reverses as the loan ages.
You can 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 at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Yamini Patel at (832) 730-2000 for details.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs feature this cap, which means they can't increase over a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. Plus, the great majority of ARMs have a "lifetime cap" — this means that your interest rate won't exceed the capped amount.
ARMs usually start out at a very low rate that usually increases over time. You may hear people talking 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 kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the house longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (832) 730-2000. We answer questions about different types of loans every day.