Differences between adjustable and fixed loans
A fixed-rate loan features the same payment amount over the life of your mortgage. The property tax and homeowners insurance will go up over time, but for the most part, payments on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage toward principal. That reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in the lower 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 can assist you in locking a fixed-rate at a favorable rate. Call Executive Lending Group, LLC at (816) 525-8000 & (81 to learn more.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on a federal 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.
The majority of Adjustable Rate Mortgages feature this cap, so they won't go up over a specific amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment can't increase beyond a certain amount in a given year. Most ARMs also cap your rate over the life of the loan period.
ARMs most often feature their lowest, most attractive rates at the beginning. They guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.
You might choose an ARM to take advantage of a very low initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell or refinance at the 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.