Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on a fixed-rate loan will be very stable.
When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. The amount applied to your principal amount goes up gradually every month.
Borrowers might choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more 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 the best rate currently available. Call Executive Lending Group, LLC at (816) 525-8000 & (81 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by an outside index. Some examples of outside indexes 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.
Most ARM programs feature a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment won't increase beyond a fixed amount in a given year. In addition, almost all ARM programs have a "lifetime cap" — your interest rate can't exceed the capped percentage.
ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.
You might choose an ARM to take advantage of a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers are unable to sell or refinance their loan.
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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