Differences between fixed and adjustable loans

A fixed-rate loan features the same payment amount over the life of your loan. The property taxes and homeowners insurance will increase over time, but generally, payments on fixed rate loans change little over the life of the loan.

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

Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Texas Financial Resource Management, Inc at (972) 991-6115 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most programs have a cap that protects borrowers from sudden monthly payment increases. 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 though the underlying index 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 your 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 their lowest rates at the beginning. They usually guarantee the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for people who plan to move before the loan adjusts.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on staying in the home longer than the introductory low-rate period. 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.