Interest Only Fixed Rate Mortgages – Fixed rate mortgages and adjustable rate mortgages (ARMs) are two mortgages that have different interest rate structures. Fixed rate mortgages have an interest rate that stays the same throughout the life of the mortgage, while ARMS have interest rates that can fluctuate based on broader market trends. Learn more about fixed rate mortgages and adjustable rate mortgages, including the pros and cons of each.
A fixed mortgage has an interest rate that remains unchanged for the duration of the loan. So your payments will stay the same every month. (However, the principal percentage will change.) Keeping payments the same provides predictability, which makes budgeting easier.
Interest Only Fixed Rate Mortgages
The main advantage of a fixed rate loan is that if interest rates rise, the borrower is protected from an unexpected and significant increase in monthly mortgage payments. Fixed rate mortgages are also easy to understand.
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A potential downside to a fixed-rate mortgage is that it can be more difficult to get a loan when interest rates are high, as payments are usually higher than comparable ARMs.
If broad interest rates fall, the interest rate on a fixed rate mortgage will not. If you want to take advantage of lower interest rates, you’ll need to refinance your mortgage, which includes closing costs.
The partial amortization schedule below shows how you can make the same monthly payment with a fixed rate mortgage, but the amount required to pay off the principal and interest may change. In this example, the mortgage term is 30 years, the principal amount is $100,000, and the interest rate is 6%.
Even with a fixed interest rate, the total amount of interest you pay depends on the term of the mortgage. Traditional lenders offer a range of fixed rate mortgages with terms of 30, 20 and 15 years.
Different Types Of Mortgages
A 30-year mortgage, which offers the lowest monthly payment, is often a popular choice. However, the longer the term of your mortgage, the more total interest you will pay.
Short-term mortgages have higher monthly payments, so the principal is paid off in a shorter period of time. A short-term mortgage offers a lower interest rate, allowing you to pay off more of the principal with each mortgage payment. So, short-term mortgages usually have a much lower interest rate.
The interest rate on an adjustable rate mortgage is variable. The initial interest rate on an ARM is relatively lower than the interest rate on a fixed rate loan. The rate may then increase or decrease depending on broader interest rate trends. After many years, the interest rate on an ARM can exceed the rate for a comparable fixed rate loan.
ARMs have a fixed period of time during which the initial interest rate remains constant. After that, the interest rate is adjusted at certain regular intervals. The period during which the interest rate can change can vary significantly — from about a month to 10 years. Shorter settlement periods usually result in lower initial interest rates.
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After the initial term, ARM loan interest rates can be adjusted, meaning there is a new interest rate based on current market rates. This is the rate before the next correction, which may happen next year.
ARMs are more complicated than fixed rate loans, so understanding the pros and cons requires understanding some basic terminology. Here are a few things you should know before deciding whether to get a fixed or adjustable rate mortgage:
The main advantage of an ARM is that, at least initially, it has a lower monthly payment compared to a fixed rate mortgage. Low payments make it easier to get a loan.
As interest rates drop, ARM mortgage rates will drop without the need to refinance your mortgage.
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A borrower who chooses an ARM can save several hundred dollars per month for the initial term. After that, the interest rate can be increased or decreased based on market rates. If interest rates fall, you’ll save more money. But if they go up, your costs will go up.
ARMs, however, have some drawbacks that should be considered. With an ARM, your monthly payments can change frequently over the life of the loan, and you can’t predict if they will go up or down or by how much. This makes it difficult to budget for mortgage payments in a long-term financial plan.
And if your budget is tight, you may face financial difficulties if interest rates rise. Some ARMs are structured so that interest rates can nearly double over the course of a few years. If you can’t pay, you could lose your home.
Indeed, after the subprime mortgage crash of 2008, adjustable rate mortgages fell out of favor with many financial planners, ushering in an era of foreclosures and short sales. Borrowers faced sticker shock when their ARMs adjusted and their payments skyrocketed. Since then, government regulations and laws have increased gun control.
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Several factors should be considered when choosing a mortgage, including your personal financial situation and the broader economic environment. Ask yourself the following questions:
If you are considering an ARM, you can calculate the payments for different scenarios and pay them up to the maximum limit.
If interest rates are high and expected to fall, an ARM can help you take advantage of the drop because you’re not tied to a specific rate. If interest rates are rising or if your payment is important to you, a fixed rate mortgage may be the best option for you.
ARM may be a better option in several scenarios. First, if you plan to live in the home for the short term, you’ll want to take advantage of the lower initial interest rates that an ARM provides.
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The initial term of an ARM, in which the interest rate does not change, is usually one to seven years. If you plan to live in your home that long, or if you plan to pay off your mortgage early before interest rates rise, an ARM can make good financial sense.
If you expect to earn more in the future, ARM might also make sense. If the ARM is eligible for a higher interest rate, the higher income will help you increase your monthly payments. Keep in mind that if you can’t pay, you risk losing your home to foreclosure.
A 5/5 ARM is a mortgage with a rate that adjusts every 5 years. The interest rate will remain unchanged during the initial period of 5 years. It can then be increased or decreased depending on market conditions. After that, it remains the same for another 5 years, is adjusted again and continues until the end of the mortgage term.
A hybrid ARM is an adjustable-rate mortgage that remains fixed for the initial term and then continuously adjusts thereafter. For example, a hybrid ARM may remain fixed for the first 5 years and then adjust annually.
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An interest-only mortgage is one that pays only interest as monthly payments over a number of years. These loans usually provide a lower monthly payment amount.
Regardless of the type of loan you choose, careful selection will help you avoid costly mistakes. Weigh the pros and cons of fixed and adjustable rate mortgages, including monthly payment amounts and their long-term interest rates. Consider consulting with a professional financial advisor to review mortgage options for your specific situation.
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Life After Your Fixed Rate Mortgage
The table below shows the current rates on 30-year Boulder mortgages. You can use the menus to select other loan conditions, change the loan amount, change the down payment or change the location. More features are available in the advanced drop-down menu
The above calculator allows you to quickly see credit information “at a glance”. If you want to visualize your results, use the calculator below.
Fixed-rate mortgages are the most common form of home financing in the United States. They allow home buyers to lock in a fixed APR and fixed monthly payment for the life of the loan. The most popular term is a 30-year mortgage,
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