Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion gradually reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. 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 learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they can't increase over a specified amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in one period. Plus, the great majority of ARM programs have a "lifetime cap" — this cap means that your interest rate won't go over the capped percentage.
ARMs usually start out at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the home longer than the initial low-rate period. ARMs are risky if property values go down and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (816) 525-8000 & (81. It's our job to answer these questions and many others, so we're happy to help!
Got a Question?
Do you have a question? We can help. Simply fill out the form below and we'll contact you with the answer, with no obligation to you. We guarantee your privacy.