Adjustable versus fixed rate loans

A fixed-rate loan features the same payment amount over the life of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate loan, most of the payment is applied to interest. The amount applied to principal goes up gradually each month.

Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Executive Lending Group at (405) 615-8543 to learn more.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if 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 won't increase beyond a certain amount over the course of a given year. In addition, almost all ARM programs feature a "lifetime cap" — your interest rate won't go over the capped amount.

ARMs most often feature their lowest, most attractive rates toward the start. They provide the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit people who plan to move before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the home for any longer than the initial low-rate period. ARMs are risky when property values go down and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (405) 615-8543. We answer questions about different types of loans every day.

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