Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your mortgage. The amount that goes to principal (the amount you borrowed) goes up, however, your interest payment will go down accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller percentage toward principal. This proportion gradually reverses as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call One Source Lending 303-220-7500 at 303-220-7500 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment won't increase beyond a fixed amount in a given year. Plus, almost all adjustable programs feature a "lifetime cap" — this means that your rate will never go over the cap percentage.
ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the initial lock expires.
You might choose an ARM to take advantage of a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell or refinance with a lower property value.