Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The portion allocated to your principal (the actual loan amount) goes up, however, your interest payment will go down accordingly. The property tax and homeowners insurance will increase over time, but in general, payments on fixed rate loans vary little.
When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Affinity Mortgage Brokers at 719-425-2226 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on 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.
Most ARMs feature this cap, which means they can't increase over a specified amount in a given period of time. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment won't increase beyond a certain amount in a given year. Additionally, the great majority of adjustable programs feature a "lifetime cap" — your rate won't exceed the capped amount.
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". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on remaining in the house longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 719-425-2226. It's our job to answer these questions and many others, so we're happy to help!