Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment stays the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans change little over the life of the loan.

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

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call F&T Mortgage, Inc. NMLS # 168839 (www.nmlsconsumeraccess.org) at 214-300-8756 to discuss your situation with one of our professionals.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages are capped, which means they won't increase above a specific amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. Plus, almost all ARM programs feature a "lifetime cap" — this cap means that your interest rate won't exceed the cap amount.

ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are best for people who anticipate moving in three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 214-300-8756. We answer questions about different types of loans every day.



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