Adjustable versus fixed loans
A fixed-rate loan features a fixed payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller part toward principal. The amount paid toward principal goes up slowly each month.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Executive Lending Group, LLC at (816) 525-8000 & (81 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 ARMs feature this cap, so they can't go up above a certain amount in a given period. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment can't go above a fixed amount in a given year. Plus, the great majority of ARMs feature a "lifetime cap" — this means that your interest rate will never exceed the capped amount.
ARMs most often feature the lowest, most attractive rates at the start. They provide the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of ARMs benefit borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the home longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell their home 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.