Adjustable versus fixed loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. The property tax and homeowners insurance will increase over time, but in general, payments on these types of loans vary little.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller percentage toward principal. 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 interest rate. People select these types of loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Firelight Mortgage Consultants at (303) 228-2254 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, which means they can't increase over a certain amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can go up in one period. In addition, the great majority of ARM programs have a "lifetime cap" — your interest rate can't ever exceed the capped percentage.
ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory 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 adjust. Loans like this are often best for people who expect to move in three or five years. These types of ARMs most benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan on staying in the house longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.
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!