Fixed versus adjustable rate loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The portion of the payment that goes to your principal (the amount you borrowed) goes up, however, your interest payment will decrease in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for a fixed-rate loan will increase very little.

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

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of 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 into a fixed-rate loan can provide greater consistency 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 Capacity Lending, LLC at 469-640-0400 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment can't increase beyond a fixed amount in a given year. In addition, the great majority of adjustable programs have a "lifetime cap" — your rate won't go over the capped amount.

ARMs usually start out at a very low rate that may increase over time. You may have heard 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 certain 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 benefit people who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the home longer than this initial low-rate period. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at 469-640-0400. It's our job to answer these questions and many others, so we're happy to help!

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