Fixed versus adjustable loans
With a fixed-rate loan, your payment never changes for the life of the loan. The portion allocated to principal (the amount you borrowed) goes up, but the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call First Source Capital Mortgage, Inc. at 903-482-1123 for details.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on a federal index. A few of these are: the 6-month 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 ARMs feature this cap, which means they won't go up above a certain amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can increase in a given period. The majority of ARMs also cap your rate over the life of the loan.
ARMs usually start at a very low rate that usually increases over time. You've likely read about 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. Loans like this are best for borrowers who expect to move within three or five years. These types of ARMs benefit borrowers who will move before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the home longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 903-482-1123. It's our job to answer these questions and many others, so we're happy to help!