Adjustable versus fixed loans
A fixed-rate loan features a fixed payment amount over the life of your loan. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans vary little.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part toward principal. The amount applied to your principal amount goes up gradually every month.
Borrowers 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 wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Executive Lending Group, LLC at (816) 525-8000 & (81 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest for ARMs are determined by a federal index. A few of these 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 Adjustable Rate Mortgages feature this cap, so they won't go up above a specific amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment will not increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often feature the lowest rates toward the start of the loan. They usually guarantee that rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit people who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates 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.