Adjustable versus fixed loans

With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount paid toward principal increases up gradually each month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Foxfield Financial at 720-598-8300 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment will not increase beyond a fixed amount over the course of a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — your interest rate can't go over the cap amount.

ARMs usually start out at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who will move before the initial lock expires.

You might choose an ARM to take advantage of a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.

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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