Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment never changes for the life of the loan. The amount of the payment allocated to principal (the actual loan amount) will increase, however, the amount you pay in interest will decrease accordingly. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. That reverses as the loan ages.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Colorado Mortgage Company at 719-357-6601 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects you from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment won't increase beyond a certain amount over the course of a given year. In addition, almost all adjustable programs feature a "lifetime cap" — your rate won't exceed the cap percentage.
ARMs most often feature their lowest rates toward the beginning of the loan. They usually guarantee 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. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying in the house for any longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 719-357-6601. We answer questions about different types of loans every day.