If you're considering a mortgage loan in Texas, it's important to understand the different types of mortgages available. One popular option is an adjustable-rate mortgage (ARM), which offers some benefits and drawbacks compared to other options.
To help you make the right decision about a loan in Texas, we'll discuss what ARM mortgages are, how they work, and the pros and cons of getting one. So, should you get an ARM mortgage loan in Texas? Let's take a closer look!
What you should know about adjustable rate mortgages
An adjustable-rate mortgage, or ARM, is a type of mortgage loan in which the interest rate is not fixed. Instead, it fluctuates with changes in the market. The initial interest rate is usually lower than that of a fixed-rate mortgage, but it can go up or down over time.
How the initial fixed-rate period works
One key feature of an ARM is the initial fixed-rate period. This is the length of time (usually five to seven years) during which your interest rate will be set at a certain level and will not change, no matter what happens in the market.
After this period ends, your interest rate will begin to adjust according to changes in the market.
What is the interest rate cap feature?
Another important feature to know about is the interest rate cap. This limits how much your interest rate can increase during each adjustment period.
For example, if your interest rate is capped at two percent and the market rates rise by three percent, your interest rate would only go up by two percent.
There are three types of ARM interest rate caps: initial adjustment cap, subsequent adjustment cap, and lifetime adjustment cap.
The initial cap tells you how much the interest rate can increase during the first adjustment after the initial fixed period. The subsequent cap tells you how much the interest rate can increase in the period after that. Finally, the lifetime cap tells you how much the interest rate can increase in total for the remaining term of the loan.
It's important to understand each of the adjustment caps, so you know what to expect from your ARM rates over the life of the loan.
What are the different types of ARMs?
There are several different types of ARM loans available. Some common options include:
These have a fixed-rate period followed by an adjustable period. The most popular option is the five-year ARM, which has a fixed rate for five years before adjusting.
With this type of loan, you only have an interest payment for the first few years (usually five to seven). After that, your monthly payment will include both interest and principal.
Negative amortization ARM
These loans have low initial payments, but the balance of the loan can increase if your payments don't cover the full amount of interest owed.
3/1 ARMs and 5/1 ARMs
With these loans, your interest rate is fixed for three or five years, respectively, and then begins adjusting.
How are they different from a fixed-rate mortgage?
ARM loans differ from fixed-rate mortgages in several ways. First, as we mentioned, the interest rate is not fixed and can fluctuate over time.
Second, ARM loans typically have a lower interest rate than fixed-rate mortgages during the initial fixed-rate period. Finally, ARM loans may have an interest rate cap feature to protect against large increases in your payments.
What are the benefits of an ARM loan?
There are several benefits of an ARM loan.
First, as we mentioned, the initial interest rate is usually lower than that of a fixed-rate mortgage. This can save you money in the short term.
Second, ARM loans offer some protection against rising interest rates, thanks to the interest rate cap feature.
Third, ARM loans may offer a lower monthly payment than a fixed-rate mortgage, at least during the initial fixed-rate period.
What are the disadvantages of an ARM loan?
There are also some drawbacks to ARM loans. It's important to understand all possible risks before proceeding.
First, as we mentioned, the interest rate is not fixed and can fluctuate over time. This means that your payments could go up or down, which could make it difficult to budget for your mortgage payments.
Second, if interest rates rise sharply after the initial fixed-rate period, you could end up paying much more than you would with a fixed-rate mortgage. Finally, ARM loans may have higher closing costs than other types of loans.
Could an adjustable-rate mortgage be right for you?
An ARM loan might be right for you if you're looking for a lower interest rate and monthly payment during the initial fixed-rate period. However, it's important to remember that your payments could go up or down after that period ends, so be sure to speak with a loan officer to see if an ARM loan is right for you.
Are ARM mortgages popular in Texas?
ARM loans are popular in Texas, but they're not right for everyone. Be sure to speak with a loan officer to learn more about ARM loans and whether or not they're right for you.
Currently, mortgage interest rates are on the rise. If you're looking to take out a new loan for a mortgage, an ARM might provide you with a lower initial interest rate for a short period.
Since mortgage interest rates change periodically, you may have the opportunity to refinance to a fixed-rate loan once rates drop again However, refinancing is not always an option, and before you take out an ARM loan, you should make sure you're in a position to continue to pay for the remaining term.
Finding the right loan and lender for your needs
When you're ready to apply for a mortgage, it's important to find the right loan and lender for your needs. At Texas United Mortgage, we can help you find the perfect mortgage loan for your situation.