Fixed versus adjustable loans
A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans don't increase much.
Early in a fixed-rate loan, most of your payment pays interest, and a much smaller part goes to principal. The amount paid toward principal increases up slowly every month.
You can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), 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.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment will not go above a fixed amount in a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — your rate can't ever go over the capped percentage.
ARMs most often have the lowest rates at the beginning. They usually guarantee 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 set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. These loans are best for people who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low introductory rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at 720-598-8300. We answer questions about different types of loans every day.