Fixed versus adjustable rate loans

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

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage toward principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Abundance Home Mortgage at (512) 335-7800 to discuss how we can help.

There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.

The majority of ARMs feature this cap, which means they won't increase above a specific amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. Plus, almost all adjustable programs have a "lifetime cap" — your rate will never exceed the cap amount.

ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They provide the lower rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (512) 335-7800. We answer questions about different types of loans every day.

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