Adjustable versus fixed loans

A fixed-rate loan features the same payment over the life 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 for your fixed-rate loan will be very stable.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage toward principal. This proportion reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Abundance Home Mortgage at (512) 335-7800 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs are capped, which means they can't increase above a specific amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in one period. In addition, almost all ARM programs feature a "lifetime cap" — this cap means that your rate can't ever exceed the cap amount.

ARMs usually start out at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. For 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 adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (512) 335-7800. We answer questions about different types of loans every day.

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