Fixed and Adjustable

Differences between fixed and adjustable loans

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With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call My Mortgage Option at 469-322-4391 to learn more.

There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most ARMs feature this cap, which means they can't go up over a specified amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment won't go above a fixed amount in a given year. Most ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature their lowest, most attractive rates at the beginning. They usually guarantee the lower interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. 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 borrowers who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than the initial low-rate period. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at 469-322-4391. We answer questions about different types of loans every day.