Adjustable versus fixed rate loans

A fixed-rate loan features the same payment over the life of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on your fixed-rate loan will be very stable.

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

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when 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 monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call 24/7 Mortgage at 832-407-2668 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, which means they can't increase above a specific amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment can't go above a certain amount in a given year. In addition, almost all ARM programs feature a "lifetime cap" — this means that the rate can never exceed the cap percentage.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who plan to move before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than the initial low-rate period. ARMs are risky when property values go down and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at 832-407-2668. We answer questions about different types of loans every day.