Differences between fixed and adjustable loans
With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The amount allocated to principal (the loan amount) goes up, but your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments for your fixed-rate loan will be very stable.
At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. The amount applied to principal increases up gradually each month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call One Source Lending 303-220-7500 at 303-220-7500 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in one period. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often feature their lowest rates toward the start. They guarantee the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These 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 ARMs are best for borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers are unable to sell their home or refinance their loan.