Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The amount of the payment allocated for principal (the amount you borrowed) will go up, however, your interest payment will go down in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments for a fixed-rate loan will increase very little.
When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking 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, as we called them above — come in a great number of varieties. Generally, interest rates on ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, which means they can't go up above a specified amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though 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 your monthly payment can go up in a given period. In addition, almost all ARM programs have a "lifetime cap" — the rate won't exceed the capped percentage.
ARMs most often have their lowest rates toward the beginning of the loan. They provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for people who expect to move within three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the home for any longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 303-220-7500. It's our job to answer these questions and many others, so we're happy to help!