Differences between adjustable and fixed loans

A fixed-rate loan features the same payment over the life of the loan. 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 increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. That reverses as the loan ages.

Borrowers can 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 wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Longhorn Mortgage at 512-302-9410 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in one period. Plus, the great majority of ARM programs have a "lifetime cap" — your interest rate can never exceed the capped amount.

ARMs usually start out at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set 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. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will 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 on remaining in the home longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 512-302-9410. We answer questions about different types of loans every day.

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