Fixed versus adjustable loans

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With a fixed-rate loan, your monthly payment never changes for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for a fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount paid toward principal goes up slowly every month.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Paul M. Johnson - Mortgage Banker at 512-326-2186 to discuss your situation with one of our professionals.

There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment won't increase beyond a certain amount in a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — this means that your interest rate won't exceed the capped percentage.

ARMs most often have the lowest, most attractive rates at the start. They guarantee the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the home longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 512-326-2186. We answer questions about different types of loans every day.