Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The portion that goes to principal (the amount you borrowed) increases, but your interest payment will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans change little over the life of the loan.
When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater stability 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 Affinity Mortgage Brokers at 719-331-6278 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust every six months, based on various indexes.
Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in one period. Plus, the great majority of ARM programs have a "lifetime cap" — your rate won't go over the capped amount.
ARMs most often have the lowest rates at the start of the loan. They provide that 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. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will move before the loan adjusts.
You might choose an ARM to take advantage of a lower initial rate and count 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 their loan.
Have questions about mortgage loans? Call us at 719-331-6278. We answer questions about different types of loans every day.