Adjustable versus fixed rate loans
A fixed-rate loan features the same payment amount over the life of the mortgage. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Executive Lending Group, LLC at (816) 525-8000 & (81 for details.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment can't go above a fixed amount in a given year. Additionally, the great majority of ARM programs feature a "lifetime cap" — your interest rate will never exceed the cap amount.
ARMs most often have the lowest, most attractive rates toward the beginning of the loan. They usually provide the lower rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the house for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell 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!
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