Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. 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 change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate 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 stability in monthly payments. 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.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment won't increase beyond a fixed amount in a given year. Plus, almost all ARMs have a "lifetime cap" — this cap means that the interest rate won't go over the capped amount.
ARMs most often feature the lowest, most attractive rates toward the start of the loan. They provide that rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the house longer than the initial low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at 720-598-8300. We answer questions about different types of loans every day.