Adjustable versus fixed loans
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With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call eCU Mortgage at 713-676-5255 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment will not increase beyond a fixed amount over the course of a given year. The majority of ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for borrowers 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 initial lock expires.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to remain in the house longer than this introductory low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 713-676-5255. It's our job to answer these questions and many others, so we're happy to help!