Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. The property tax and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller part goes to principal. The amount paid toward your principal amount increases up slowly each month.
You might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in this low 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 discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.
Most programs feature a cap that protects you from sudden monthly payment increases. 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 goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your payment can increase in one period. Additionally, the great majority of ARMs feature a "lifetime cap" — this means that your rate can't ever exceed the cap amount.
ARMs most often have their lowest, most attractive rates toward the beginning of the loan. They usually guarantee that interest rate from a month to ten years. You've probably 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 loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the house longer than the introductory low-rate period. ARMs can be risky if property values decrease and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 720-598-8300. We answer questions about different types of loans every day.