Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The amount of the payment that goes to your principal (the amount you borrowed) goes up, but the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans vary little.

At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Firelight Mortgage Consultants at (720) 550-4235 for details.

There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

Most programs feature a "cap" that protects you from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment won't increase beyond a certain amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.

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". In 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. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the loan adjusts.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the home longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (720) 550-4235. It's our job to answer these questions and many others, so we're happy to help!

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