Fixed versus adjustable rate loans
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A fixed-rate loan features a fixed payment amount over the life of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on a fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part toward principal. The amount applied to principal increases up gradually every month.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater 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 Tigers Community Credit Union at 573-443-8462 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most programs have a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in one period. Most ARMs also cap your interest rate over the life of the loan.
ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In 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 adjust. These loans are best for people who expect to move in three or five years. These types of adjustable rate programs 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 house for any longer than the initial low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 573-443-8462. It's our job to answer these questions and many others, so we're happy to help!