Fixed versus adjustable loans

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With a fixed-rate loan, your payment stays the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for your fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate loan, the majority the payment goes toward interest. The amount paid toward your principal amount increases up gradually each month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call City Star Lending at (512) 577-6222 to discuss how we can help.

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

The majority of Adjustable Rate Mortgages are capped, which means they can't increase above a specified amount in a given period. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in one period. Almost all ARMs also cap your rate over the life of the loan.

ARMs most often have the lowest, most attractive rates toward the beginning. They provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory 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. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit people who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (512) 577-6222. We answer questions about different types of loans every day.

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