Differences between fixed and adjustable loans
With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The amount of the payment allocated to principal (the actual loan amount) increases, however, the amount you pay in interest will decrease accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on your fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part toward principal. This proportion gradually reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Firelight Mortgage Consultants at (303) 228-2254 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, so they won't increase over a certain amount in a given period of time. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment can't go above a fixed amount over the course of a given year. In addition, almost all ARMs have a "lifetime cap" — this cap means that your interest rate won't exceed the capped percentage.
ARMs most often feature the lowest, most attractive rates at the start of the loan. They guarantee that rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers are unable to sell their home or refinance.
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!