Adjustable versus fixed loans
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With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The portion allocated for principal (the loan amount) increases, however, your interest payment will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate loan, most of the payment is applied to interest. This proportion reverses as the loan ages.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater 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 Mortgage X-Change at 214-383-9400 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs feature a "cap" that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment can't go above a certain amount over the course of a given year. The majority of ARMs also cap your rate over the life of the loan period.
ARMs usually start out at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 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. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for people who will move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values go down and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 214-383-9400. It's our job to answer these questions and many others, so we're happy to help!