Fixed versus adjustable rate loans
A fixed-rate loan features the same payment amount over the life of your loan. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans vary little.
At the beginning of a a fixed-rate loan, most of the payment goes toward interest. This proportion reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Affinity Mortgage Brokers at 719-425-2226 for details.
There are many different types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment won't go above a certain amount over the course of a given year. Plus, almost all ARMs feature a "lifetime cap" — your interest rate can never exceed the cap amount.
ARMs most often feature their lowest rates toward the start. They provide the lower interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they 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 benefit people who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the home longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell their home 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!