Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The portion of the payment allocated for your principal (the loan amount) increases, however, your interest payment will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily to pay 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 fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call Foxfield Financial at 720-598-8300 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment will not increase beyond a fixed amount in a given year. The majority of ARMs also cap your rate over the life of the loan period.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then 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 people who anticipate moving in three or five years. These types of ARMs most benefit people who plan to 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 longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell their home 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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