Differences between fixed and adjustable loans

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With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The amount of the payment allocated for principal (the actual loan amount) increases, but your interest payment will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan go primarily toward interest. That reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate 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 offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Anita Martinez-Trumm at 303-596-8672 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, which means they won't increase above a specified amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. The majority of ARMs also cap your rate over the duration of the loan.

ARMs most often feature the lowest, most attractive rates toward the beginning. They provide the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 303-596-8672. It's our job to answer these questions and many others, so we're happy to help!