Adjustable versus fixed loans
A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on a fixed-rate mortgage will be very stable.
When you first take out a fixed-rate loan, most of your payment is applied to interest. The amount applied to principal goes up slowly every month.
You might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Executive Lending Group at (405) 822-1957 for details.
There are many different types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on an outside 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.
Most ARMs are capped, which means they can't go up over a specified amount in a given period. Some ARMs won't increase more than two percent 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 the payment can go up in one period. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have the lowest, most attractive rates toward the start of the loan. They guarantee the lower interest 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. Loans like this are best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (405) 822-1957. We answer questions about different types of loans every day.