Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. The property tax and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. This proportion reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate 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 provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Tenby J. Dahman at (303) 862-7760 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs have a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment will not go above a fixed amount in a given year. Almost all ARMs also cap your rate over the life of the loan period.
ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit people who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (303) 862-7760. It's our job to answer these questions and many others, so we're happy to help!