Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment remains the same for the life of your loan. The portion allocated for principal (the amount you borrowed) will go up, however, the amount you pay in interest 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. For the most part payments for a fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. The amount paid toward your principal amount increases up slowly each month.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in this 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 currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call One Source Lending 303-220-7500 at 303-220-7500 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-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 you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can increase in one period. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You may have heard 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 loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky if property values decrease and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at 303-220-7500. We answer questions about different types of loans every day.