Fixed versus adjustable loans

With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The amount that goes for principal (the actual loan amount) will go up, however, the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans don't increase much.

When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. The amount applied to your principal amount goes up slowly every month.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Reliant Mortgage Services at (956) 622-4307 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest rates for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs are capped, which means they won't increase above a certain amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't increase beyond a certain amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature the lowest rates toward the beginning. They provide that interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will move before the loan adjusts.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the home longer than this introductory low-rate period. ARMs can be risky if property values decrease and borrowers cannot sell or refinance their loan.