Differences between adjustable and fixed rate loans

With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The amount allocated for your principal (the actual loan amount) increases, however, your interest payment will decrease accordingly. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans vary little.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller percentage goes to principal. The amount applied to your principal amount goes up gradually every month.

You might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Executive Lending Group, LLC at (816) 525-8000 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in one period. Almost all ARMs also cap your rate over the duration of the loan period.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for people who will move before the loan adjusts.

You might choose an ARM to get a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be 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. It's our job to answer these questions and many others, so we're happy to help!

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