Differences between adjustable and fixed loans

A fixed-rate loan features the same payment amount over the life of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay , more of your payment goes toward principal.

You can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Foxfield Financial at 720-598-8300 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment can't go above a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan period.

ARMs most often have their lowest, most attractive rates toward the beginning of the loan. They provide that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values decrease and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call us at 720-598-8300. We answer questions about different types of loans every day.

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