Adjustable versus fixed rate loans

A fixed-rate loan features the same payment amount over the life of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts for your fixed-rate mortgage will increase very little.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call Affinity Mortgage Brokers at 719-425-2226 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust every six months, based on various indexes.

Most programs have a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment will not go above a certain amount in a given year. In addition, the great majority of ARMs have a "lifetime cap" — this cap means that the rate can't ever go over the capped amount.

ARMs most often have the lowest rates at the start. They usually provide that interest 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. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 719-425-2226. We answer questions about different types of loans every day.


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