Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. 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, most of your monthly payment goes toward interest, and a much smaller part toward principal. The amount paid toward your principal amount increases up gradually each month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Firelight Mortgage Consultants at (303) 228-2254 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment will not increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 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 usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at (303) 228-2254. We answer questions about different types of loans every day.