Adjustable versus fixed rate loans

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Your first few years of payments on a fully-amortizing fixed-rate loan go mostly to pay interest.  Depending on any prepayments you make or defaults that may occur, more of your payments will go to pay down the principal balance with age.

You might choose a fixed-rate loan in order to lock in a low interest rate.

Some people may choose these types of loans if interest rates are low and they want to lock in a low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan may provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you get a fixed-rate loan at a favorable rate. Call Service Mortgage at (214) 945-1066 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on different federal and international indices. A few of these are: the 3-month LIBOR rate, a one-year rate tied to U.S. Treasury securities, and the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI).

Most ARMs feature a cap, which means they can't increase above a specific amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example:  two percent a year, even though the index the rate is based on goes up by more than two percent.

Sometimes an ARM features a "payment cap" which guarantees your payment will not increase beyond a certain amount in a given year. Additionally, the great majority of adjustable programs feature a "lifetime cap" — this cap means that the rate will never go over the capped percentage.

ARMs most often feature their lowest rates toward the beginning. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period the loan may adjust each year, depending on the loan program.  Loans like this may be ideal for people who expect to move within three to five years.

Many people who choose ARMs may choose them when they want to take advantage of lower introductory rates or simply don't plan on remaining in the house for any longer than the initial low-rate period. ARMs can be extremely risky because, when housing prices go down, the homeowner could be stuck with rates that go up when they can't sell or refinance with a lower property value.