Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of the mortgage. The portion allocated to principal (the loan amount) will increase, but the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments for your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, 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 how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs 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 per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment can't increase beyond a certain amount over the course of a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — this cap means that the interest rate can't ever go over the capped amount.
ARMs most often have the lowest rates toward the beginning of the loan. They provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to stay in the house longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates 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. We answer questions about different types of loans every day.
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