Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment never changes 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 monthly payments on a fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part toward principal. The amount paid toward your principal amount goes up gradually each month.
You can 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 wish to lock in this low rate. If you have an Adjustable Rate Mortgage (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 Tyler Home Mortgage at (903) 630-7049 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, 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.
Most programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment will not go above a certain amount in a given year. The majority of ARMs also cap your rate over the duration of the loan.
ARMs most often have their lowest rates toward the start. They usually guarantee the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to get a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell or refinance with a lower property value.
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