Fixed versus adjustable loans

With a fixed-rate loan, your payment doesn't change for the life of your loan. The portion of the payment allocated for principal (the amount you borrowed) will increase, however, the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part toward principal. This proportion reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Firelight Mortgage Consultants at (303) 228-2254 for details.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by an outside index. A few of these 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 Adjustable Rate Mortgages feature this cap, which means they won't go up above a specified amount in a given period. There may be 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 goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment will not increase beyond a certain amount over the course of a given year. Additionally, almost all adjustable programs have a "lifetime cap" — this means that your interest rate will never go over the capped percentage.

ARMs most often feature the lowest rates at the start. They usually provide the lower rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For 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 certain number of years (3 or 5), then they adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to get lower introductory rates and don't plan on staying in the house longer than this initial low-rate period. ARMs can be risky if property values decrease and borrowers cannot sell their home or refinance.

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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