Differences between fixed and adjustable loans

A fixed-rate loan features the same payment amount for the entire duration of the loan. The property tax and homeowners insurance will increase over time, but in general, payments on fixed rate loans vary little.

During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a significantly smaller percentage toward principal. As you pay , more of your payment is applied to principal.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Firelight Mortgage Consultants at (303) 228-2254 to discuss your situation with one of our professionals.

There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment won't go above a certain amount in a given year. Plus, the great majority of ARM programs feature a "lifetime cap" — the interest rate will never exceed the capped amount.

ARMs most often feature their lowest rates at the beginning of the loan. They usually provide the lower 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. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are usually best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky when property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (303) 228-2254. It's our job to answer these questions and many others, so we're happy to help!

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