Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of the mortgage. The amount that goes to principal (the amount you borrowed) will go up, but the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for your fixed-rate loan will increase very little.
When you first take out a fixed-rate loan, the majority your payment goes toward interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they wish to lock in 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'll be glad to help you lock in a fixed-rate at a good rate. Call Firelight Mortgage Consultants at (303) 228-2254 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest on ARMs are determined by 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 have a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment can't go above a fixed amount in a given year. Most ARMs also cap your rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs most benefit people who will move before the loan adjusts.
You might choose an ARM to get a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at (303) 228-2254. It's our job to answer these questions and many others, so we're happy to help!