Differences Between Fixed and Adjustable Loans
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A fixed-rate loan features a fixed payment over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner’s insurance in your monthly payment. For the most part payments on your fixed-rate loan will increase very little.
When you first take out a fixed-rate mortgage loan, the majority your payment is applied to interest. The amount paid toward principal increases up gradually each month.
You might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we’d love to help you lock in a fixed-rate at the best rate currently available. Call The Rich Flanery Team at 970-577-9200 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank’s 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages feature this cap, so they can’t go up above a certain amount in a given period. Some ARMs won’t increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a “payment cap” that instead of capping the interest rate directly, caps the amount that the payment can go up in a given period. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates at the start of the loan. They guarantee the lower rate from a month to ten years. You may hear people talking about “3/1 ARMs” or “5/1 ARMs”. For these loans, the introductory 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. These loans are best for people who expect to move in three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (970)-577-9200. We answer questions about different types of loans every day.