An Adjustable Rate Mortgage (ARM) is a hybrid mortgage that starts with a fixed introductory rate, often 5/1, 7/1, or 10/1, and then adjusts at set intervals based on a market index (commonly the Secured Overnight Financing Rate) plus a preset margin. In Texas, ARMs allow you to lower your initial monthly payment while keeping future changes bounded by rate caps. This unique combination of payment efficiency now with guardrails later can be a savvy financial move in fast-moving markets, empowering you with flexible payment options.
The market benchmark (e.g., SOFR). When the index changes, your rate can change at the next reset.
A fixed number your lender adds to the index to determine your fully indexed rate.
Limits on how much your rate can rise at the first adjustment, at each subsequent adjustment, and over the life of the loan (e.g., 2/1/5 or 5/1/5).
Modern ARMs commonly reset every six months after the fixed period (that's the "/6" you see in 5/6, 7/6, 10/6).
You choose a 7/6 ARM with a low introductory rate. For seven years, your rate is fixed. After that, your rate can reset every six months, but only within your cap structure, so even if market rates spike, your increases are stepped and bounded, not unlimited.
Even with a stable interest rate, escrowed property taxes and homeowners’ insurance can change annually. Plan a cushion so your total payment remains comfortable.
Choose an ARM if you want payment efficiency today and you’re likely to refinance or sell within the fixed window. Consider a fixed-rate mortgage instead if you expect to own the home long-term, prioritize maximum payment certainty, or prefer to eliminate rate-change risk.
Q: Is a fixed-rate mortgage better than an ARM in Texas?
A: A fixed-rate mortgage keeps the same interest rate for the entire term, providing maximum payment stability. It can be the better fit if you plan to stay in the home long-term or prefer predictable payments over potential savings from an ARM’s lower introductory rate.
Q: Can I switch from an ARM to a fixed-rate mortgage later in Texas?
A: Yes. Many homeowners refinance from ARM to fixed when it suits their goals, such as locking a stable payment or capitalizing on favorable market rates. Refinancing depends on market conditions, the amount of equity, and your eligibility.
Q: Do fixed-rate mortgages protect me from payment shocks due to rising rates?
A: Yes. With a fixed-rate loan, the principal and interest portion of your payment does not change. Keep in mind that escrowed taxes and insurance may still increase or decrease, regardless of the loan type.
Q: When might a fixed-rate beat an ARM in Texas?
A: A fixed-rate can be stronger if you’ll own the home for a long time, expect rates to rise significantly, or simply value certainty over the payment efficiency of an ARM’s lower starting rate.
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