Adjustable versus fixed rate loans

A fixed-rate loan features the same payment amount over the life of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate mortgage will increase very little.

When you first take out a fixed-rate loan, most of the payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Foxfield Financial at 720-598-8300 to learn more.

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

The majority of Adjustable Rate Mortgages are capped, which means they won't increase above a specific amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. Additionally, the great majority of adjustable programs have a "lifetime cap" — this means that the interest rate can't go over the cap amount.

ARMs most often have their lowest, most attractive rates toward the beginning. They usually 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 types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.

You might choose an ARM to get a very low introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell or refinance at the 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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