Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans change little over the life of the loan.

At the beginning of a a fixed-rate loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

You can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. 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 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment won't go above a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.

ARMs most often feature the lowest rates toward the start. They provide that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. 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 with a 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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