Differences between fixed and adjustable loans
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With a fixed-rate loan, your monthly payment stays the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but generally, payment amounts on these types of loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward your principal amount goes up gradually every month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call FirstSouth Mortgage at 972-279-3700 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest rates on ARMs are determined by an outside 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 are capped, so they can't go up over a certain amount in a given period of time. 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 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 ensures your payment will not increase beyond a certain 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 rates at the beginning. They guarantee that rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the house longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell their home or refinance with a lower property value.
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