Differences between fixed and adjustable rate loans

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

During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller part toward principal. This proportion reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Reliant Mortgage Ltd at (214) 545-5700 to discuss your situation with one of our professionals.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on an outside 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.

The majority of ARMs feature this cap, so they can't go up over a specified amount in a given period of time. 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 underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment can't go above a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs usually start out at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the initial lock expires.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (214) 545-5700. It's our job to answer these questions and many others, so we're happy to help!