Differences between fixed and adjustable rate loans

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A fixed-rate loan features a fixed payment amount over the life of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans don't increase much.

At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. This proportion gradually reverses itself as the loan ages.

You might choose a fixed-rate loan to take advantage of a “set” rate of interest that does not change throughout the life of the loan. Although the amount of principal and interest paid each month varies from payment to payment, the total payment remains the same, which allows homeowners to budget easier. For homeowners who have an ARM (Adjustable Rate Mortgage, the interest rates are more favorable in the beginning, but will adjust at a pre-arranged frequency over time. Call First National Bank at 469-666-1461 to learn more.

There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most programs feature a "cap" that protects borrowers from sudden increases in monthly payments. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can go up in a given period. The majority of ARMs also cap your rate over the life of the loan.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "5/1 ARMs" or "7/6 month ARMs". In these loans, the introductory rate is set for three or five years. After the fixed period it may adjusts annually or semi-annually. These types of loans are fixed for a certain number of years (5 or 7), then adjust. These loans are usually best for people who anticipate selling or refinancing within 5 to 7 years. 

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan to stay in the house for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 469-666-1461. It's our job to answer these questions and many others, so we're happy to help!