Adjustable versus fixed rate loans

With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. This proportion gradually reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with 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 the best rate currently available. Call Firelight Mortgage Consultants at (303) 228-2254 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month 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 ARMs feature this cap, so they won't go up over a certain amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a certain amount in a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — your interest rate can't ever exceed the capped amount.

ARMs most often feature their lowest rates toward the beginning of the loan. They guarantee the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 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 they adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs are best for people who will move before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell their home or refinance.

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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