Adjustable versus fixed loans

A fixed-rate loan features the same payment amount over the life of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate 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 provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call Mortgages Plus at (720) 633-5799 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most ARM programs feature a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in a given period. Almost all ARMs also cap your interest rate over the duration of the loan period.

ARMs most often feature the lowest, most attractive rates at the beginning. They guarantee that interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set 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 usually best for people who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on remaining in the house longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell or refinance with a lower property value.