Adjustable versus fixed rate loans
A fixed-rate loan features the same payment for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments on your fixed-rate mortgage will be very stable.
When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. The amount applied to principal increases up gradually every month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Longhorn Mortgage at 512-302-9410 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment won't increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs most often have their lowest rates toward the start of the loan. They provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of ARMs benefit people who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on staying in the home longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 512-302-9410. We answer questions about different types of loans every day.
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