Differences between fixed and adjustable loans
A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because 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 provide 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 a favorable rate. Call One Source Lending 303-220-7500 at 303-220-7500 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are generally adjusted every six months, based on various indexes.
Most programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in a given period. Most ARMs also cap your interest rate over the life of the loan.
ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually 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 initial lock expires.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the house longer than this introductory low-rate period. ARMs can be risky if property values go down and borrowers can't sell their home or refinance.
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!