Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment for the entire duration of your loan. The property taxes and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans don't increase much.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage goes to principal. As you pay on the loan, more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because 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 greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Foxfield Financial at 720-598-8300 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates on ARMs are based on a federal 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 ARM programs feature a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment can't go above a certain amount over the course of a given year. Additionally, almost all ARMs have a "lifetime cap" — the interest rate won't go over the capped percentage.
ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are usually best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at 720-598-8300. It's our job to answer these questions and many others, so we're happy to help!