Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The portion allocated to principal (the amount you borrowed) goes up, however, your interest payment will decrease in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller percentage goes to principal. That gradually reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking 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 many varieties. Generally, interest rates for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 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 borrowers from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment won't increase beyond a fixed amount in a given year. In addition, almost all ARM programs have a "lifetime cap" — the interest rate can't ever go over the cap percentage.
ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be 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.