Adjustable versus fixed rate loans

With a fixed-rate loan, your payment never changes for the life of your loan. 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. But generally payments for your fixed-rate mortgage will be very stable.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage toward principal. That reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Executive Lending Group, LLC at (816) 525-8000 to discuss your situation with one of our professionals.

There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.

The majority of ARMs feature this cap, so they won't go up over a specified amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment can't go above a certain amount over the course of a given year. Additionally, the great majority of ARM programs feature a "lifetime cap" — this cap means that your interest rate can't ever go over the cap amount.

ARMs most often feature the lowest, most attractive rates toward the start. They usually guarantee that interest rate from a month to ten years. 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 loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to stay in the house for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (816) 525-8000. It's our job to answer these questions and many others, so we're happy to help!

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