Adjustable versus fixed rate loans
A fixed-rate loan features the same payment amount for the entire duration of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans vary little.
When you first take out a fixed-rate loan, most of your payment goes toward interest. That gradually reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (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 the best rate currently available. Call Executive Lending Group at (405) 822-1957 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects you from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the underlying index 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 in a given year. The majority of ARMs also cap your rate over the life of the loan period.
ARMs usually start out at a very low rate that usually increases over time. 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. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then 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 benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan to stay in the home for any longer than this initial low-rate period. ARMs are risky if property values go down and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (405) 822-1957. It's our job to answer these questions and many others, so we're happy to help!