Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment over the life of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for a fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount applied to principal goes up gradually every month.

You might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Foxfield Financial at 720-598-8300 to discuss your situation with one of our professionals.

There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most programs feature a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if the underlying index increases 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. Additionally, the great majority of ARM programs have a "lifetime cap" — this cap means that your rate can't ever exceed the capped amount.

ARMs most often feature their lowest rates toward the beginning of the loan. They guarantee the lower 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 fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for borrowers who expect to move within three or five years. These types of ARMs most benefit people who will move before the loan adjusts.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan to stay in the house longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell their home or refinance with a lower property value.

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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