Adjustable versus fixed loans
A fixed-rate loan features a fixed payment amount over the life of your mortgage. The property taxes and homeowners insurance will go up over time, but for the most part, payments on these types of loans vary little.
When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. This proportion 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 want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide 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 a favorable rate. Call Affinity Mortgage Brokers at 719-331-6278 to discuss your situation with one of our professionals.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARMs feature this cap, which means they won't go up above a specific amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment can't go above a certain amount in a given year. The majority of ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have the lowest, most attractive rates toward the beginning of the loan. They usually guarantee that rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 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 a number of years (3 or 5), then adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to move before the loan adjusts.
You might choose an ARM to take advantage of a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at 719-331-6278. It's our job to answer these questions and many others, so we're happy to help!