Adjustable versus fixed loans

A fixed-rate loan features the same payment over the life of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for a fixed-rate loan will be very stable.

At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. The amount paid toward your principal amount goes up slowly every month.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call Executive Lending Group at (405) 615-8543 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on an outside index. Some examples of outside indexes 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 ARMs feature this cap, so they can't increase above a certain amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in a given period. Most ARMs also cap your interest rate over the duration of the loan.

ARMs most often feature their lowest, most attractive rates at the start of the loan. They usually guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for people who expect to move in three or five years. These types of ARMs are best for people who plan to move before the loan adjusts.

You might choose an ARM to take advantage of a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at (405) 615-8543. It's our job to answer these questions and many others, so we're happy to help!

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