Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment never changes for the entire duration of the loan. The amount that goes to your principal (the amount you borrowed) will go up, but the amount you pay in interest will decrease accordingly. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on these types of loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage toward principal. As you pay on the loan, more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. 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 (720) 550-4235 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest rates on ARMs are determined by a federal index. A few of these are: the 6-month 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 ARMs are capped, which means they won't increase above a specified amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment will not increase beyond a certain amount in a given year. Additionally, almost all ARM programs feature a "lifetime cap" — the interest rate can't exceed the capped percentage.
ARMs most often have the lowest, most attractive rates toward the start of the loan. They usually 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 introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on staying in the house for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (720) 550-4235. We answer questions about different types of loans every day.