Adjustable versus fixed loans
With a fixed-rate loan, your payment remains the same for the entire duration of the loan. The amount that goes for principal (the amount you borrowed) will go up, but your interest payment will decrease in the same amount. The property tax and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount paid toward your principal amount increases up slowly every month.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Executive Lending Group, LLC at (816) 525-8000 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest rates on 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 programs feature 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 increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in one period. Additionally, the great majority of adjustable programs feature a "lifetime cap" — this means that your rate can't ever exceed the capped amount.
ARMs most often feature the lowest, most attractive rates at the start. They usually provide the lower rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are best for borrowers who expect to move within three or five years. These types of ARMs benefit people who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the house longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (816) 525-8000. We answer questions about different types of loans every day.