Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment amount over the life of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans don't increase much.
When you first take out a fixed-rate loan, most of your payment is applied to interest. That reverses itself as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Foxfield Financial at 720-598-8300 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates for ARMs are determined by a federal index. A few of these 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.
Most ARMs feature this cap, which means they can't increase over a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the index the rate is based on goes up 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 a given period. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs most often feature the lowest, most attractive rates toward the beginning of the loan. They usually guarantee that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For 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 adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of ARMs benefit borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low introductory 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 if they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 720-598-8300. We answer questions about different types of loans every day.