Adjustable versus fixed loans

A fixed-rate loan features a fixed payment amount over the life of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. This proportion reverses as the loan ages.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Abundance Home Mortgage at (512) 335-7800 to discuss how we can help.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the one-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 are capped, so they won't go up above a specific amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment can't increase beyond a fixed amount in a given year. In addition, almost all ARM programs feature a "lifetime cap" — this cap means that the interest rate can't go over the capped amount.

ARMs most often feature their lowest, most attractive rates at the start. They usually provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed 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 after the initial period. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky when property values decrease and borrowers cannot sell or refinance their loan.

Have questions about mortgage loans? Call us at (512) 335-7800. It's our job to answer these questions and many others, so we're happy to help!

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