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Fixed & Adjustable Mortgage Rates: Everything You Need to Know

When you’re considering taking out a mortgage loan, you must first determine which loan is best for you. Getting a clear understanding of different mortgage companies, types of mortgages, primarily Fixed Rate Mortgage or Adjustable Rate Mortgage, will help you plan and proceed accordingly. In addition, our experienced mortgage lenders in Texas can help you find the best loan for your needs and budget.

Understanding the Similarities & Disparities between FRM & ARM

Selecting the right mortgage lender is very important. Our mortgage lenders in Texas can help and provide you with mortgage lenders for Texas home loans. Types of home loans in Texas include Conventional or Fixed Rate Mortgage, Adjustable-Rate Mortgage, FHA Loan, VA Loan, Balloon Mortgage, Jumbo Loan, and USDA loans. Consider your budget, housing needs, and the financial risks involved before deciding on any loan. 

Fixed-Rate Mortgage (FRM): A Glimpse

Fixed-Rate Mortgages (FRM) provides you with a fixed interest rate, whereas ARM interest rates can be altered based on current rates. An FRM is one of the two primary mortgage loans that charge a set rate of interest that is not subject to change throughout the loan period. As a result, this type of loan makes long-term budgeting much easier.

Fixed Rate Mortgage - Lone Star Financing

With an FRM, the principal and interest paid will vary over time. Interest fees are higher at the beginning of the loan, but the total payment amount remains the same. One downside of an FRM is when the interest rate may be higher but you are locked into that rate for the loan duration. On the plus side, you can refinance in the future if interest rates fall, but you will have to go through the loan process again and pay all fees associated with the process.

Adjustable-Rate Mortgage: A Glimpse

An adjustable-rate mortgage, also called a variable-rate mortgage, is a mortgage loan with the interest rate adjusted periodically based on an index that reflects the cost to the lender. The loan will be availed to you based on the lender’s standard variable rate/base.

Apart from the fundamental differences, you need to understand some crucial disparities & similarities to make an informed decision regarding your mortgage.

How is ARM Different from FRM?

The Difference in Margin Level

ARM rates will never fall below a certain margin. It remains the same as we mentioned earlier.  In the case of an ARM, the index will change based on the market conditions, but the margin remains the same under all market fluctuations. When you apply for an ARM, the lender will tell you the margin in advance, which will remain the same until your mortgage is closed.

Interest Rate Cap Doesn’t Alter

ARM loans have rate caps. They limit the amount of any alteration in the interest rate within a single period and over the lifetime of your loan. Your loan amount won’t fluctuate if it hits the rate cap. An initial cap is defined as the maximum percentage limit your interest rate can increase or decrease after your fixed-rate period expires.

DTI Ratio is a Determinant

The debt-to-income ratio is the income your household brings per month compared to the total expenditure that occurs per month. This is something all mortgage lenders look for when applying for a mortgage loan. If your DTI ratio is high, it will be easier to qualify for an ARM than a fixed-rate mortgage.

DTI Ratio for Mortgage - Lone Star Financing

What are the Similarities in ARM & FRM?

Total Term Length Remains the Same

Both ARMs and fixed-rate loans provide you with the same term lengths. Term length is defined as the number of years needed to pay the entire loan amount with the interest rate.

Credit Score Plays a Major Role

Your credit score is a significant factor determining whether you are eligible to get the loan. The higher your credit score, the higher your chances are of getting a loan. A credit score represents your credit history and financial stability. It informs a lender of how consistent a borrower is when paying back debts. Most lenders and financial institutions consider a good credit score 700 or greater.

Credit Score for Mortgage - Lone Star Financing

Choosing the Right Loan

Understanding the intricacies of financing and mortgages can help make the decision-making process more manageable. Which loan is right for you depends on your specific needs and budget.

Fixed Mortgages are the Best Choice If:

  • Fixed interest rates can give you more stability, and you can make extra payments toward the principal to pay down your loan at any time.
  • Fixed-rate loans allow you to predict what you need to pay in interest every year without factoring in market rates. If financial budgeting is a priority for you, we suggest you opt for FRM.
  • If interest rates are low, you can save money by locking in at a low rate. If fixed-rate loans have higher initial rates than ARMs, you can benefit from a lower interest rate when rates increase.
Fixed Interest Rates for Mortgage - Lone Star Financing

Adjustable Mortgages are the Best Choice If:

  • ARMs begin with lower interest rates than fixed loans. This gives you some flexibility in your budget to make extra payments towards your principal.
  • ARMs allow you to build equity and enjoy the benefits of a lower interest rate while saving for your dream home.
  • When interest rates are high, choosing an ARM is a good idea. The ARM changes as the market fluctuates, so your interest rate will decrease when rates go down.
  • If you’re close to retirement and you’re planning on selling soon, ARMs allow you to invest more into your retirement fund while providing lower interest rates.

Our Conclusion

The first step in deciding whether a fixed-rate mortgage or an ARM is the best choice in today’s market is to talk to multiple lenders. This will help you discover which rates you qualify for. It will also help determine which loan terms make sense for you, given your credit score, income, debts, down payment, and the monthly payment you can afford. 

To learn more about Texas mortgage loans and the different types of home loans in Texas, get in touch with Lone Star Financing, your local mortgage lender in Texas! We can help you find a home loan that works best for your needs and budget!

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