Adjustable versus fixed rate loans

With a fixed-rate loan, your payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments on a fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan go mostly toward interest. That reverses as the loan ages.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Foxfield Financial at 720-598-8300 to learn more.

There are many different types of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 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 feature this cap, so they won't go up above a specified amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can go up in one period. The majority of ARMs also cap your interest rate over the life of the loan.

ARMs most often feature their lowest rates toward the beginning of the loan. They guarantee that interest rate for an initial period that varies greatly. 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. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a lower initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they can't sell their home or refinance at the 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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