Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate mortgage will increase very little.

When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. The amount paid toward your principal amount goes up slowly every month.

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 wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call Acceptance Home Loans at 817-878-4220 to learn more.

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

Most programs have a cap that protects you from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can go up in a given period. Almost all ARMs also cap your rate over the life of the loan period.

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 have heard 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 3 or 5 years, then adjust. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to get a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 817-878-4220. We answer questions about different types of loans every day.