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Making the decision to buy a home is the largest financial decision most of us will ever make. Buying your first home is something you have worked hard for. A lot of work goes into the purchasing process itself, including choosing what type of mortgage to apply for.

There are two primary mortgage types: Fixed-Rate and Adjustable-Rate. Each one offers different benefits, so let's take a closer look at each one. Understanding these two main types of mortgages will put you ahead of the game when you sit down with your INB mortgage lender.

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Fixed-Rate Mortgages

With a fixed-rate mortgage, your monthly payment remains constant until your balance is paid in full. This means your interest rate will not change with the market after you have signed for the loan.

There are several benefits to a fixed-rate mortgage. For example, if interest rates increase, you’ll have the comfort of knowing that you are locked into the same low rate you started with. If interest rates decrease in the future, you can go back to your INB loan officer to see if refinancing the loan will save you interest costs over time.

Many individuals enjoy the stability that fixed-rate mortgages provide. Planning for the same mortgage payment each month is more convenient, and there won’t be any unexpected changes in your budget from month to month.

Typically, with a fixed-rate mortgage, you can choose between a 15-year or 30-year mortgage. In both cases, your total loan amounts are the same. The time it takes to pay it off varies: in a 15-year mortgage, your monthly cost will be higher to pay off your loan faster than with a 30-year mortgage.

When choosing a fixed-rate mortgage, make sure that you’re considering the total interest cost over the life of the loan. Since you’re getting the convenience of a fixed interest rate, it will generally be set higher than with an adjustable-rate mortgage. Depending on how long you intend to live in the home, you may be able to save money with an adjustable-rate mortgage.

Adjustable-Rate Mortgage (ARM)

The primary difference between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) is that your interest rate will change over time. It’s common for ARMs to have a fixed rate for an initial number of years, then transition to an adjustable rate after that time. Generally, ARMs have a lower initial interest rate than a fixed-rate mortgage.

The adjustable rate is determined by mortgage lenders annually. Lenders use two numbers to calculate new interest rates: the index and the margin.

The Index

The index is a benchmark interest rate that changes based on general market conditions. The most often used index for mortgages is the one-year LIBOR, or London Inter-Bank Offer Rate. The LIBOR is published in major newspapers like the Wall Street Journal.

The Margin

The margin is made up of percentage points that are added to the index. For example, if the current index rate is 2.5 and your lender adds a margin of 3 percent, then the interest rate on your mortgage will be 5.5 percent. The margin is determined by your lender, and usually won’t change after closing.

Understanding Annual Adjustments

Adjustable-rate mortgages are often referenced as a 1/1, 5/1 or 7/1. Understanding what this means is key to understanding your adjustable-rate mortgage.

The first number specifies how many years your initial fixed-rate will be in place, and the second number references how frequently your adjustable-rate can be adjusted each year. For example, 1/1 means that your initial fixed rate will be in place for one year and it will be adjusted once per year, or annually.

Annual adjustments are typical for adjustable-rate mortgages, but there are some mortgages that allow for multiple adjustments per year.

Many buyers ask if there is a limit to how high their interest rate can rise. The short answer is yes. Many times there is a cap or limit to how much your interest can rise.

Caps are also expressed in terms of number ratios, such as 1/2 or 2/5, with the first number being the limit of how much your interest can rise in a year, and the second number represents the total percentage that it can rise overall. For example, if your mortgage says it has a 3/6 cap, this means that your interest cannot rise more than 3% per year and can not increase by more than 6% over the life of your loan.

The Importance of Choosing the Right Mortgage 

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We understand how important, but overwhelming, the mortgage selection process can be, and that's why we’re here to help. Knowing how to compare and understand the long-term costs of your loan can save you money.

At Inter National Bank, you can apply online to simplify your mortgage loan process even more. We offer loan options for 15- and 30-year mortgages including conventional, FHA, VA, construction loans, 80-10-10, Fannie Mae, mortgages for foreign nationals and a down payment assistance program through TSAHC.

Our mortgage loan professionals can help get you pre-approved and calculate how much mortgage you can afford. Call us at 866-716-9594 or visit our main branch in McAllen to get pre-approved with one of our mortgage loan professionals today.