Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment amount over the life of the mortgage. The property taxes and homeowners insurance will increase over time, but generally, payment amounts on fixed rate loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. This proportion reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Foxfield Financial at 720-598-8300 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARMs are capped, so they can't increase over a specified amount in a given period. Some ARMs won'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 rate directly, caps the amount that the monthly payment can go up in one period. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often have their lowest rates at the start of the loan. They usually 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 introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually 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.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the house longer than the initial low-rate period. ARMs can be risky if property values decrease and borrowers can't 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.