Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment amount over the life of the loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on these types of loans vary little.

Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage toward principal. That gradually reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in the low 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'd love to help you lock in a fixed-rate at a favorable rate. Call F&T Mortgage, Inc. NMLS # 168839 (www.nmlsconsumeraccess.org) at 214-300-8756 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, which means they can't go up above a specific amount in a given period of time. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can go up in one period. The majority of ARMs also cap your rate over the duration of the loan.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or simply 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 if they can't sell their home or refinance at the 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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