Fixed versus adjustable loans
A fixed-rate loan features the same payment amount over the life 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 monthly payments for your fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part toward principal. The amount applied to principal increases up gradually every month.
You 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 the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Community Mortgage, LLC (NMLS: #224143) at (816) 595-0664 for details.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-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 are capped, which means they can't increase above a certain amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in a given period. Most ARMs also cap your rate over the life of the loan.
ARMs most often feature the lowest, most attractive rates at the start of the loan. They guarantee the lower rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are often best for people who expect to move within three or five years. These types of ARMs benefit borrowers who plan to move before the loan adjusts.
You might choose an ARM to take advantage of a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values decrease and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at (816) 595-0664. We answer questions about different types of loans every day.