Adjustable versus fixed loans

A fixed-rate loan features a fixed payment over the life of the loan. The property tax and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans don't increase much.

At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Executive Lending Group, LLC at (816) 525-8000 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.

Most programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. In addition, the great majority of ARMs have a "lifetime cap" — the interest rate can't ever go over the capped amount.

ARMs most often feature the lowest, most attractive rates toward the start of the loan. They guarantee that interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it 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 in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (816) 525-8000. We answer questions about different types of loans every day.

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