Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment over the life of your loan. The property tax and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. This proportion reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Foxfield Financial at 720-598-8300 for details.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages are capped, which means they won't increase above a certain amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in a given period. In addition, almost all adjustable programs have a "lifetime cap" — this means that your interest rate can never go over the cap percentage.

ARMs most often have their lowest rates at the beginning. They usually guarantee that rate for an initial period that varies greatly. 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. 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 often best for borrowers who expect to move 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 ARM to get a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers cannot 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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