Differences between fixed and adjustable loans
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A fixed-rate loan features a fixed payment for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call AA Mortgage at 713-370-LOAN(5626) to learn more.
There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment can't increase beyond a certain amount in a given year. Additionally, the great majority of adjustable programs feature a "lifetime cap" — your interest rate can't go over the cap amount.
ARMs usually start out at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky if property values go down and borrowers cannot sell or refinance.