Differences between adjustable and fixed rate loans

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With a fixed-rate loan, your payment remains the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on these types of loans don't increase much.

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

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Nations Reliable Lending, LLC at (512) 537-8000 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, so they won't increase above a specified amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your payment can go up in one period. In addition, almost all adjustable programs feature a "lifetime cap" — your rate can't ever go over the capped amount.

ARMs most often feature the lowest, most attractive rates at the start of the loan. They usually guarantee the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers cannot sell or refinance their loan.

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