Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on your fixed-rate loan will increase very little.

At the beginning of a a fixed-rate loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call American Bank of Oklahoma at 9183711065 for details.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

The majority of ARMs feature this cap, so they won't go up over a specific 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 per year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can increase in one period. Plus, the great majority of adjustable programs feature a "lifetime cap" — this cap means that the rate will never go over the capped percentage.

ARMs usually start at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of ARMs are best for people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell their home or refinance at the lower property value.