Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment never changes for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on your fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay , more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call First National Bank at 325-998-8740 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, which means they won't increase above a specified amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment will not increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature their lowest rates at the start. They provide that interest rate from a month to ten years. 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 it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values decrease and borrowers cannot sell or refinance.

Have questions about mortgage loans? Call us at 325-998-8740. We answer questions about different types of loans every day.

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