Differences between fixed and adjustable loans

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With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The portion allocated to your principal (the loan amount) will increase, however, your interest payment will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments for a fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount applied to your principal amount increases up slowly each month.

You can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call www.JordanWilde.com at 469.450.9453 to discuss how we can help.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by 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.

The majority of Adjustable Rate Mortgages feature this cap, so they can't increase above a certain amount in a given period. Some ARMs won'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 rate directly, caps the amount the monthly payment can go up in one period. Additionally, the great majority of ARMs have a "lifetime cap" — your interest rate can't ever go over the capped percentage.

ARMs most often have the lowest rates toward the beginning. They guarantee the lower rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for people who expect to move in three or five years. These types of ARMs are best for people who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the home longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 469.450.9453. We answer questions about different types of loans every day.