Adjustable versus fixed loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate loan, the majority your payment is applied to interest. The amount paid toward your principal amount goes up gradually every month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Foxfield Financial at 720-598-8300 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, so they can't increase over a certain amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment won't increase beyond a fixed amount over the course of a given year. Additionally, almost all ARMs feature a "lifetime cap" — this cap means that your interest rate can never go over the cap amount.
ARMs most often feature the lowest rates toward the beginning. They guarantee that rate for an initial period that varies greatly. You may have heard 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 a certain number of years (3 or 5), then adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values go down and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at 720-598-8300. We answer questions about different types of loans every day.