Differences between adjustable and fixed loans
A fixed-rate loan features a fixed payment over the life of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, most of your payment pays interest, and a much smaller part toward principal. The amount paid toward principal goes up slowly every month.
You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Executive Lending Group at (405) 822-1957 for details.
There are many types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, so they won't go up over a specified amount in a given period. Your ARM may feature a cap on interest rate variances 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 features a "payment cap" which ensures that your payment will not go above a certain amount over the course of a given year. In addition, the great majority of adjustable programs have a "lifetime cap" — the interest rate will never exceed the cap percentage.
ARMs most often feature their lowest, most attractive rates at the beginning. They usually provide the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are usually 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.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on staying in the house for any longer than this initial low-rate period. ARMs are risky when property values go down and borrowers cannot sell 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!