Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The portion of the payment allocated to principal (the amount you borrowed) increases, however, your interest payment will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage toward principal. The amount applied to principal increases up gradually every month.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Colorado Mortgage Company at 719-357-6601 for details.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they won't increase over a certain amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment can't go above a certain amount over the course of a given year. In addition, the great majority of ARMs have a "lifetime cap" — the interest rate won't exceed the cap percentage.
ARMs most often have their lowest, most attractive rates at the start of the loan. They usually provide the lower rate from a month to ten years. 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 loans are fixed for 3 or 5 years, then they adjust. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 719-357-6601. It's our job to answer these questions and many others, so we're happy to help!