Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment stays the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans vary little.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part toward principal. As you pay , more of your payment goes toward principal.

You might 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 this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Affinity Mortgage Brokers at 719-331-6278 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by an outside index. A few of these 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. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a certain amount in a given year. The majority of ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start out at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial 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 after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.

Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the home longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 719-331-6278. We answer questions about different types of loans every day.

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