Fixed versus adjustable loans

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 tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on fixed rate loans don't increase much.

At the beginning of a a fixed-rate loan, the majority your payment is applied to interest. That gradually reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Abundance Home Mortgage at (512) 335-7800 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal 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 Adjustable Rate Mortgages feature this cap, so they can't increase above a specific amount in a given period of time. Some ARMs can'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 directly, caps the amount the monthly payment can go up in one period. In addition, the great majority of ARMs feature a "lifetime cap" — the rate can't ever go over the cap percentage.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set 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 often best for people who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on staying in the home for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates 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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