Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount applied to principal goes up gradually every month.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater 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 a good rate. Call One Source Lending 303-220-7500 at 303-220-7500 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes 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 programs have a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment can't increase beyond a certain amount over the course of a given year. In addition, almost all ARM programs have a "lifetime cap" — your rate can never go over the cap percentage.

ARMs usually start out at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the loan adjusts.

Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 303-220-7500. We answer questions about different types of loans every day.