Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. That reverses itself as the loan ages.
You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Executive Lending Group, LLC at (816) 525-8000 & (81 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs are capped, which means they won't increase over a specific amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can increase in a given period. Plus, almost all ARM programs have a "lifetime cap" — your interest rate can't exceed the capped amount.
ARMs most often feature their lowest, most attractive rates toward the beginning of the loan. They provide that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on staying in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell their home or refinance with a lower property value.
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!