Fixed versus adjustable loans

With a fixed-rate loan, your payment stays the same for the entire duration of your mortgage. The portion of the payment allocated to principal (the loan amount) will increase, however, the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. The amount paid toward principal goes up slowly every month.

You can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater 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 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most programs feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment will not go above a fixed amount over the course of a given year. Additionally, almost all ARM programs feature a "lifetime cap" — this means that the rate can't ever go over the capped percentage.

ARMs usually start at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who will move before the loan adjusts.

You might choose an ARM to take advantage of a very low introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot 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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