Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment for the entire duration 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 for your fixed-rate mortgage 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 goes toward principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Firelight Mortgage Consultants at (303) 228-2254 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. A few of these 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 Adjustable Rate Mortgages feature this cap, so they can't increase above a specified amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can go up in one period. The majority of ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature their lowest, most attractive rates toward the beginning of the loan. They usually guarantee the lower rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will move before the loan adjusts.

Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (303) 228-2254. We answer questions about different types of loans every day.

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