Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on your fixed-rate loan will be very stable.

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

You might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to 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, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs have 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 two percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment won't increase beyond a certain amount in a given year. In addition, almost all ARM programs feature a "lifetime cap" — this cap means that the interest rate won't exceed the capped percentage.

ARMs usually start at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who will move before the loan adjusts.

Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to stay in the home 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 or refinance with a lower property value.

Have questions about mortgage loans? Call us at 720-598-8300. It's our job to answer these questions and many others, so we're happy to help!

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