Adjustable versus fixed rate loans

With a fixed-rate loan, your payment doesn't change for the entire duration of your loan. The portion of the payment that goes for your principal (the loan amount) will increase, however, the amount you pay in interest will go down in the same amount. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount paid toward principal goes up slowly each month.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Tenby J. Dahman at (303) 862-7760 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.

Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up 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 the monthly payment can go up in a given period. Almost all ARMs also cap your interest rate over the life of the loan period.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed 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 usually best for people who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the initial lock expires.

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

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