Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. The property taxes and homeowners insurance will go up over time, but generally, payments on fixed rate loans vary little.
When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. The amount applied to your principal amount increases up gradually each month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Executive Lending Group, LLC at (816) 525-8000 & (81 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages feature this cap, so they won't go up over a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment will not go above a certain amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates toward the beginning. They usually guarantee that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to remain in the house longer than the introductory low-rate period. ARMs are risky when property values decrease and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at (816) 525-8000 & (81. It's our job to answer these questions and many others, so we're happy to help!
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