Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment remains the same for the life of the loan. The amount of the payment allocated for your principal (the amount you borrowed) will go up, however, your interest payment will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans don't increase much.
When you first take out a fixed-rate loan, most of the payment goes toward interest. The amount paid toward your principal amount goes up gradually each month.
You might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call One Source Lending 303-220-7500 at 303-220-7500 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, which means they won't go up over a specific amount in a given period. 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 though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment will not go above a fixed amount over the course of a given year. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature the lowest rates at the start of the loan. They provide that interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are best for people who anticipate moving in three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell or refinance with a lower property value.