Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment amount over the life of your mortgage. The property tax and homeowners insurance will increase over time, but in general, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount applied to principal goes up gradually each month.
You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when 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 provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Milestone Mortgage dba TMC at (303) 877-0415 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they can't increase above a specific amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment will not increase beyond a fixed amount over the course of a given year. Additionally, the great majority of ARMs have a "lifetime cap" — this means that your interest rate can't exceed the cap percentage.
ARMs usually start out at a very low rate that usually increases as the loan ages. 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. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for people who expect to move in three or five years. These types of ARMs benefit people who will move before the loan adjusts.
You might choose an ARM to get a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky when property values decrease and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at (303) 877-0415. It's our job to answer these questions and many others, so we're happy to help!