Adjustable versus fixed rate loans

With a fixed-rate loan, your payment doesn't change for the life of the loan. The portion allocated for principal (the loan amount) will increase, however, your interest payment will go down accordingly. The property taxes and homeowners insurance will increase over time, but generally, payments on fixed rate loans vary little.

At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. That reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability 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 Affinity Mortgage Brokers at 719-425-2226 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates on ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages feature this cap, which means they can't go up over a specified amount in a given period of time. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in one period. Plus, almost all adjustable programs feature a "lifetime cap" — your interest rate won't exceed the capped percentage.

ARMs most often have the lowest, most attractive rates at the start of the loan. They provide that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get 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!


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