Differences between adjustable and fixed loans

A fixed-rate loan features the same payment amount over the life of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward your principal amount increases up slowly every month.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Firelight Mortgage Consultants at (303) 228-2254 for details.

There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

Most ARM programs have a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment won't go above a fixed amount over the course of a given year. Plus, the great majority of ARMs have a "lifetime cap" — this cap means that your interest rate can't ever exceed the capped amount.

ARMs most often feature their lowest rates at the beginning of the loan. They usually provide the lower rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers cannot sell 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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