Adjustable versus fixed loans

With a fixed-rate loan, your payment never changes for the entire duration of your mortgage. The portion of the payment that goes to principal (the amount you borrowed) will go up, however, your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate mortgage will be very stable.

When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. The amount paid toward your principal amount goes up gradually each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when 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 greater monthly payment stability. 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 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, so they can't go up above a specified amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't go above a certain amount in a given year. The majority of ARMs also cap your rate over the duration of the loan.

ARMs most often have their lowest rates toward the beginning. They guarantee that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), 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 adjustable rate loans most benefit people who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers cannot sell 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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