Fixed versus adjustable loans
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With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The portion allocated to principal (the amount you borrowed) 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. But generally monthly payments for a fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency 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 Primary Residential Mortgage, Inc. at (214) 736-9466 to learn more.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't adjust 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 directly, caps the amount that the payment can go up in one period. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate loans are best for people who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (214) 736-9466. It's our job to answer these questions and many others, so we're happy to help!