Fixed versus adjustable rate loans

With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for your fixed-rate loan will increase very little.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. This proportion gradually reverses itself as the loan ages.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Foxfield Financial at 720-598-8300 to learn more.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment can't increase beyond a certain amount over the course of a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — your interest rate won't exceed the cap percentage.

ARMs usually start at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for people who plan to move before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan to stay in the house for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get 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 720-598-8300. It's our job to answer these questions and many others, so we're happy to help!

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