Adjustable versus fixed loans

A fixed-rate loan features the same payment over the life of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans change little over the life of the loan.

When you first take out a fixed-rate loan, most of the payment is applied to interest. This proportion gradually reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. 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 Yamini Patel at (832) 730-2000 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest on ARMs are based on a federal index. Some examples of outside indexes 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 programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment can't go above a certain amount in a given year. Plus, the great majority of ARM programs feature a "lifetime cap" — this means that your interest rate won't go over the capped amount.

ARMs most often have the lowest rates at the start of the loan. They usually guarantee the lower rate from a month to ten years. You've probably 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 loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will move before the loan adjusts.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan on remaining in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get 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 (832) 730-2000. We answer questions about different types of loans every day.

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