Adjustable vs. Fixed Rate Loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments on a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go primarily toward interest. That reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call First National Bank at 817-909-7916 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they can't increase over a specified amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment will not go above a certain amount over the course of a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — your interest rate can't go over the cap amount.
ARMs most often have the lowest rates at the start. They usually provide that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at 817-909-7916. We answer questions about different types of loans every day.