Differences between adjustable and fixed loans

With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. 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 change little over the life of the loan.

At the beginning of a a fixed-rate loan, the majority the 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 to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency 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 Tenby J. Dahman at (303) 862-7760 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest rates on ARMs are based on an outside index. Some examples of outside indexes 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 programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment can'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 feature their lowest rates at the start. They provide the lower interest rate from a month to ten years. 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. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate programs are best for people who will move before the loan adjusts.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan on staying in the home longer than this introductory low-rate period. ARMs are risky when property values decrease and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at (303) 862-7760. We answer questions about different types of loans every day.