Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. The property taxes and homeowners insurance will increase over time, but generally, payment amounts on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount paid toward principal goes up slowly each month.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Foxfield Financial at 720-598-8300 to learn more.

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

Most ARMs feature this cap, which means they can't go up above a certain amount in a given period. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment can't increase beyond a certain amount in a given year. Plus, almost all adjustable programs have a "lifetime cap" — the interest rate can't ever go over the capped percentage.

ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot 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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