Adjustable versus fixed rate loans

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With a fixed-rate loan, your payment doesn't change for the entire duration of the loan. The portion of the payment allocated for your principal (the loan amount) increases, however, your interest payment will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on your fixed-rate mortgage will increase very little.

When you first take out a fixed-rate loan, most of your payment is applied to interest. This proportion gradually reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Mortgage X Change at (214) 383-9400 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of ARMs are capped, so they won't go up above a specified amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can go up in one period. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs most often have their lowest rates toward the beginning. They usually provide that rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.

You might choose an ARM to get a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (214) 383-9400. It's our job to answer these questions and many others, so we're happy to help!