Just as the name suggest, a fixed-rate mortgage has the same, fixed interest rate over the entire life of the loan. Fixed-rate mortgages are commonly available in 15- and 30-year terms. However, they also could be available to you with 10-, 20-, 25-, and even 40-year terms. Remember, your loan balance is amortized over the life of the loan. This means that your payment is fixed for the entire duration of paying off your loan. For example: if you have a 30-year fixed-rate mortgage loan, you would make 360 equal principal and interest payments. That’s one payment per month for 30 years in order to pay off your loan.
The most obvious advantage associated with a fixed-rate mortgage is that your interest rate and payment never change. So if you plan to stay in your home for 10 years or more, you should probably consider a fixed-rate mortgage loan. That being said, you might want to consider choosing a different mortgage loan term depending on your life goals. Obviously, if your goal is to pay off your mortgage faster, you may want to choose a 15- or 20-year term instead. Alternatively, if you don’t plan on moving around and want a lower payment than what is offered by a 30-year mortgage loan payment, you may want to consider looking at a 40-year mortgage term. A 40-year mortgage term will offer lower payments as it is amortized over a 40-year period instead of 30. But you should always remember the rule of compounding interest: the longer term of loan you are taking on, the more you will have to pay in interest on the loan.
Adjustable Rate Mortgages
Adjustable rate mortgages are, again, just as the name suggests – adjustable. They are mortgages with a fluctuating interest rate—your personal interest rate will change as the national averages change. ARMs are generally shorter-term than fixed-rate mortgages, typically having 1-, 3-, 5-, or 7-year terms. In addition they usually carry lower interest rates than fixed-rate mortgages initially. With ARMs, your interest rate is fixed for a certain amount of time. After that, however, your rate generally adjusts once a year within a 2% cap. The rate can adjust up or down depending on the market.
For the most part, Americans move out of their homes within 7 to 9 years. If you know you’ll be moving within that period of time and are looking for a lower rate and payment, an ARM may be for you. It is important to remember, however, that adjustable rate mortgage loans are a bit more of a gamble considering your interest rate adjusts after the initial “fixed” interest years of the loan. If you are considering financing through an ARM, you should be know the risk and be comfortable with it.
The Federal Reserve offers a handbook that explains adjustable rate mortgages in great detail: Federal Reserve ARM Handbook.
“Interest-only” mortgages allow you to make payments that cover only the interest portion of your monthly mortgage payment for a specified period of time. Proper use of interest-only mortgages can significantly lower your monthly payment if you are running on a tight monthly budget. That being said, you can add as much as you like to your monthly payment, and that amount will be applied towards the principal balance of your mortgage loan. The idea behind “interest-only” mortgage loans can really be better defined as a feature that comes with your loan as opposed to a loan all in itself. Similar to buying a car with leather seats or a GPS, you can get a fixed-rate or an adjustable-rate mortgage alongside your interest-only payments.
Interest-only loans can be greatly beneficial to you. If you are in need of increased cash flow and want to shift some of the money you would be paying towards the principal balance of your home to something else – an interest-only loan may be something for you to consider. Interest-only loans can also be used to help you better afford a larger home when you know you can rely on an increased salary at a later point in time.
Choosing the right type of mortgage for your individual situation can provide you with security and comfort knowing you made the right decision—whereas making the wrong one can cost you. Always be sure to do your homework and work with a knowledgeable lender.
Finally, here at Rocky Mountain Bank & Trust, we would like to help you get the right mortgage loan for your personal situation. Simply fill out our online contact form, visit our Florence or Colorado Springs location, or give us a call… we’ll help you get the mortgage financing your looking for at a competitive rate. See our Support Center Page for further contact information.