Fixed versus adjustable loans
A fixed-rate loan features the same payment for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount paid toward principal goes up gradually every month.
You can 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 this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call Executive Lending Group, LLC at (816) 525-8000 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are normally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they can't increase over a specific amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment won't increase beyond a fixed amount in a given year. Additionally, the great majority of ARM programs have a "lifetime cap" — this cap means that the interest rate can't exceed the cap amount.
ARMs most often have their lowest, most attractive rates toward the beginning. They provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a very low initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell their home or refinance at the 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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