Adjustable versus fixed loans
With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The amount allocated to principal (the amount you borrowed) goes up, but your interest payment will go down accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments on a fixed-rate loan will be very stable.
At the beginning of a a fixed-rate loan, most of your payment goes toward interest. This proportion reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Executive Lending Group, LLC at (816) 525-8000 & (81 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs are capped, which means they won't go up above a certain amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment won't go above a fixed amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan.
ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who will move before the loan adjusts.
You might choose an ARM to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values decrease and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at (816) 525-8000 & (81. We answer questions about different types of loans every day.