Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment remains the same for the entire duration of the mortgage. The portion that goes for your principal (the 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 go up over time, but for the most part, payment amounts on these types of loans don't increase much.
When you first take out a fixed-rate loan, most of the payment is applied to interest. The amount applied to principal goes up slowly each month.
You can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Tenby J. Dahman at (303) 862-7760 for details.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't go above a fixed amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate loans most benefit people who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and plan on moving, refinancing or 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 (303) 862-7760. It's our job to answer these questions and many others, so we're happy to help!