Adjustable versus fixed loans

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A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans don't increase much.

At the beginning of a a fixed-rate loan, most of your payment goes toward interest. The amount paid toward principal increases up gradually every month.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call FNB Town Square Mortgage at (817) 821-5179 to learn more.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't go above a fixed amount in a given year. Almost all ARMs also cap your rate over the duration of the loan.

ARMs usually start at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit people who plan to move before the loan adjusts.

You might choose an ARM to take advantage of a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values go down and borrowers cannot sell or refinance their loan.

Have questions about mortgage loans? Call us at (817) 821-5179. It's our job to answer these questions and many others, so we're happy to help!