Adjustable versus fixed loans
With a fixed-rate loan, your payment never changes for the life of the mortgage. The portion of the payment that goes for principal (the loan amount) increases, but the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance will go up over time, but in general, payment amounts on fixed rate loans don't increase much.
When you first take out a fixed-rate loan, the majority your payment goes toward interest. The amount applied to principal increases up gradually each month.
Borrowers can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Yamini Patel at (832) 730-2000 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they can't go up over a specified amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a certain amount in a given year. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often have their lowest, most attractive rates toward the beginning of the loan. They usually provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so because they want to get lower introductory rates and don't plan to stay in the house longer than this initial low-rate period. ARMs are risky if property values go down and borrowers can't sell or refinance their loan.
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!