Differences between fixed and adjustable loans
With a fixed-rate loan, your payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage goes to principal. The amount paid toward your principal amount goes up gradually every month.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Firelight Mortgage Consultants at (303) 228-2254 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than two percent 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 that the monthly payment can go up in one period. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases as the loan ages. 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 loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the house longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at (303) 228-2254. We answer questions about different types of loans every day.