Adjustable versus fixed loans

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A fixed-rate loan features the same payment amount for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on your fixed-rate loan will increase very little.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part goes to principal. This proportion gradually reverses itself as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide 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 good rate. Call SMI Lending, Inc. at (972) 818-0022 for details.

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

The majority of ARMs feature this cap, which means they can't go up above a certain amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can increase in a given period. Additionally, the great majority of adjustable programs have a "lifetime cap" — the rate can't ever exceed the cap amount.

ARMs most often feature the lowest, most attractive rates toward the beginning of the loan. They provide the lower 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 types of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the initial lock expires.

You might choose an ARM to get a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (972) 818-0022. We answer questions about different types of loans every day.