Differences between adjustable and fixed rate loans
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With a fixed-rate loan, your payment never changes for the life of your mortgage. The portion allocated to your principal (the actual loan amount) goes up, but your interest payment will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans vary little.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part goes to principal. The amount applied to your principal amount goes up gradually each month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency 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 A Home's Best Mortgage, Inc. at (303) 650-9400 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates on ARMs are determined by a federal index. A few of these are: the 6-month 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 Adjustable Rate Mortgages are capped, so they can't go up over a certain amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in a given period. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These types of ARMs are best for people who plan to move or sell their home before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at (303) 650-9400. We answer questions about different types of loans every day.