Adjustable versus fixed loans
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A fixed-rate loan features the same payment amount for the entire duration of your mortgage. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans don't increase much.
When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Robert Weaver, Security Mortgage Co. at 972.359.7766 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, so they won't go up above a certain amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment won't increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying in the house longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 972.359.7766. It's our job to answer these questions and many others, so we're happy to help!