Adjustable versus fixed loans
A fixed-rate loan features the same payment amount for the entire duration of your mortgage. The property taxes 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 vary little.
At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.
You can 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 the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, 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.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
The majority of ARMs feature this cap, so they won't go up above a specific 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 a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment won't go above a certain amount in a given year. In addition, almost all ARMs feature a "lifetime cap" — the rate will never exceed the capped percentage.
ARMs most often have the lowest rates toward the start of the loan. They provide the lower rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit people who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values decrease and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at 303-220-7500. We answer questions about different types of loans every day.