Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The portion of the payment allocated to principal (the actual loan amount) will increase, however, the amount you pay in interest will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Foxfield Financial at 720-598-8300 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the 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 rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, which means they can't increase above a certain amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. 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. The majority of ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed 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 best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the loan adjusts.
You might choose an ARM to get a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky if property values decrease 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.