Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans vary little.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage goes to principal. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Firelight Mortgage Consultants at (720) 550-4235 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.
The majority of ARMs are capped, which means they won't increase above a certain amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment won't go above a certain amount in a given year. Plus, almost all ARMs feature a "lifetime cap" — this means that the rate can never go over the cap amount.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for people who expect to move within three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values go down and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at (720) 550-4235. It's our job to answer these questions and many others, so we're happy to help!