Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The portion of the payment that goes to principal (the amount you borrowed) will go up, but the amount you pay in interest will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate mortgage will increase very little.
When you first take out a fixed-rate mortgage loan, the majority the payment goes toward interest. This proportion reverses itself as the loan ages.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at 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 help you lock in a fixed-rate at a favorable rate. Call Executive Lending Group at (405) 822-1957 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest for 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.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in one period. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to get a very low introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell 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.