Adjustable-Rate Mortgage vs Fixed: Which Fits a Texas Buyer?
An adjustable-rate mortgage starts with a lower fixed rate for a set number of years and then resets on a schedule. A fixed-rate mortgage keeps the same rate for the life of the loan. That one difference drives almost every decision about which to choose, and for most Texas buyers the right answer depends less on the market than on how long you expect to keep the house.
This post began as a short 2019 tip telling buyers to read up on mortgages. Good advice, thin on detail. Here is the detail.
How a fixed-rate mortgage works
The rate is set at closing and never changes. Your principal and interest payment is the same in year one and year thirty. Most buyers choose a 30-year term for the lower payment, and some choose 15 years to pay less interest overall.
One thing a fixed rate does not fix is your total payment. In Texas, property taxes and homeowners insurance usually ride along in escrow, and those move every year. We explain why in escrow accounts and why your Texas payment changes.
How an adjustable-rate mortgage works
Most adjustable-rate mortgages sold today are hybrids. They carry names like 5/1 or 7/6. The first number is how many years the starting rate stays fixed. The second tells you how often it adjusts after that, either every year or every six months.
When the fixed period ends, the new rate is built from two parts. The Consumer Financial Protection Bureau explains that the index and margin work together: the index moves with the market, and the margin is a fixed amount the lender adds on top. Your loan documents spell out both.
The caps are the part to read twice
Every adjustable-rate mortgage has limits on how far the rate can move. The CFPB describes three kinds of rate caps:
- Initial adjustment cap. How far the rate can move the first time it resets. Commonly 2% or 5%.
- Subsequent adjustment cap. How far it can move at each later reset, commonly 1% to 2%.
- Lifetime cap. How far it can move in total over the life of the loan, most commonly 5%.
Before you sign, ask your lender to show you the payment at the highest rate the caps allow. If that number would break your budget, the lower starting rate is not a bargain for you.
When an adjustable rate can make sense
An adjustable-rate mortgage tends to fit a buyer who has a real reason to expect a shorter hold. A few situations we see in Fulshear and Katy:
- A job transfer with a known end date, where you expect to sell before the fixed period runs out
- A starter home you fully intend to trade up from within a few years
- A buyer who plans to pay the loan down aggressively and wants the lower early payment
The real risk is that plans change. People who expected to move in five years are often still in the same house at year eight. If you take an adjustable rate, make sure you could live with the adjusted payment if you end up staying.
When fixed is the better call
For most first-time buyers who plan to stay put, a fixed rate is the calmer choice. You know the payment, you can budget around it, and you can still refinance later if rates fall. You cannot refinance out of an adjusted rate if your credit or income has slipped by then.
Fixed also suits buyers who are already stretching on price. If a payment increase of a few hundred dollars a month would hurt, the certainty is worth more than the early savings.
Questions to ask your lender
- What is the fixed period, and how often does the rate adjust after it?
- Which index is used, and what is the margin?
- What are the initial, subsequent and lifetime caps?
- What would my payment be at the maximum rate?
- Is there a prepayment penalty?
Compare the answers on each lender’s Loan Estimate, not a verbal quote. Our guide to a mortgage broker vs a bank covers how to shop more than one lender, and mortgage rate locks explains how to hold the rate once you choose. The full buying sequence is in our home buying checklist for Texas buyers.
Written by Stacy Burgin, a real estate agent with Terra Point Realty serving Fulshear, Katy and the greater Houston area, with 300+ transactions and 130+ home sales closed. If you are weighing a fixed rate against an adjustable one and want to talk through how long you really expect to stay, call (713) 766-1697.