Adjustable versus fixed loans

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With a fixed-rate loan, your monthly payment stays the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts for your fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay , more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call FNB Town Square Mortgage at (817) 366-8666 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, which means they won't go up above a certain 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 per year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in one period. Most ARMs also cap your interest rate over the duration of the loan.

ARMs most often have their lowest, most attractive rates toward the start of the loan. They usually guarantee that interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate programs benefit people who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when property values go down and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at (817) 366-8666. We answer questions about different types of loans every day.