Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property taxes and homeowners insurance will increase over time, but in general, payments on these types of loans change little over the life of the loan.

At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Executive Lending Group, LLC at (816) 525-8000 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment will not go above a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan period.

ARMs most often have their 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 introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the house for any longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers can't sell or refinance their loan.

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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