Differences between adjustable and fixed loans

A fixed-rate loan features the same payment for the entire duration of your mortgage. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a significantly smaller part goes to principal. As you pay , more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Firelight Mortgage Consultants at (303) 228-2254 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.

Most ARMs are capped, which means they won't go up over 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. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can go up in one period. Additionally, the great majority of ARM programs have a "lifetime cap" — your rate will never exceed the cap amount.

ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 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 adjust after the initial period. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the loan adjusts.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to remain in the house longer than this initial low-rate period. ARMs are risky if property values go down and borrowers are unable to sell 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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