Adjustable versus fixed loans

With a fixed-rate loan, your payment stays the same for the life of your mortgage. The amount of the payment allocated for your principal (the amount you borrowed) increases, but the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), 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.

When you first take out a fixed-rate loan, the majority the payment goes toward interest. The amount paid toward your principal amount increases up slowly every month.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose 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 with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Abundance Home Mortgage at (512) 335-7800 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest for ARMs are determined by an outside index. A few of these 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 feature this cap, so they won't go up over a specified 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 two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment will not go above a certain amount over the course of a given year. Additionally, almost all ARMs have a "lifetime cap" — the rate won't go over the cap amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In 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 a number of years (3 or 5), then adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of ARMs benefit people who will move before the initial lock expires.

Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell their home or refinance with a 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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