Adjustable versus fixed loans

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A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans vary little.

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

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 the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more 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 a favorable rate. Call Manhattan Lending, LLC at 512.257.3749 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. The majority of ARMs also cap your interest rate over the duration of the loan period.

ARMs most often have the lowest rates at the beginning. They provide that rate for an initial period that varies greatly. 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. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the home longer than the introductory low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell or refinance their loan.

Have questions about mortgage loans? Call us at 512.257.3749. It's our job to answer these questions and many others, so we're happy to help!