Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
When you first take out a fixed-rate loan, most of the payment goes toward interest. The amount paid toward principal increases up gradually every month.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Foxfield Financial at 720-598-8300 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they won't increase over a specified amount in a given period of time. Some ARMs can't increase more than 2% 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 the payment can go up in a given period. In addition, almost all ARMs feature a "lifetime cap" — this means that your interest rate won't exceed the cap percentage.
ARMs most often feature the lowest rates toward the start of the loan. They usually guarantee the lower interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the home longer than this initial low-rate period. ARMs are risky if property values go down and borrowers can't sell or refinance.
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!