Adjustable versus fixed loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on a fixed-rate mortgage will increase very little.

At the beginning of a a fixed-rate loan, most of your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to 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, as we called them above — come in even more varieties. Generally, the interest rates 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.

Most programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment will not increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan period.

ARMs most often have the lowest, most attractive rates at the start of the loan. They provide that interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are often best for people who expect to move in three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the home longer than this initial low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell or refinance.

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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