Differences between fixed and adjustable loans

Sublime Financial often has customers shopping for mortgages in Dallas or other Texas cities who have questions about fixed-rate loans and ARMS (adjustable rate mortgage). Here's a little information on the differences when shopping for the right loan product in Texas,

With a fixed-rate loan, your payment remains the same for the entire duration of your loan. The amount that goes for principal (the actual loan amount) will go up, however, the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments for a fixed-rate mortgage will increase very little.

At the beginning of a a fixed-rate mortgage loan, the majority the payment goes toward interest. The amount applied to principal goes up gradually every month.

Borrowers can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Sublime Financial at 214-396-3650 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest rates on ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (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 programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment won't go above a certain amount over the course of a given year. In addition, almost all ARMs have a "lifetime cap" — this cap means that the interest rate won't go over the cap amount.

ARMs most often have their lowest rates toward the beginning of the loan. They guarantee the lower 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 fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for people who anticipate moving within 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 borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than this initial low-rate period. ARMs are risky when property values decrease and borrowers cannot sell their home or refinance their loan.