Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The portion of the payment that goes to your principal (the loan amount) increases, but your interest payment will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for a fixed-rate loan will be very stable.
When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Longhorn Mortgage at 512-302-9410 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates on ARMs are based on 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.
Most Adjustable Rate Mortgages are capped, so they can't go up above a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. 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 features a "payment cap" that ensures your payment won't go above a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance 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 are risky if property values go down and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 512-302-9410. It's our job to answer these questions and many others, so we're happy to help!