Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments for your fixed-rate loan will increase very little.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part toward principal. The amount paid toward principal increases up gradually each month.

You can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Affinity Mortgage Brokers at 719-425-2226 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in a given period. Most ARMs also cap your interest rate over the duration of the loan period.

ARMs most often have their lowest, most attractive rates toward the start of the loan. They usually guarantee the lower interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the house for any longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call us at 719-425-2226. We answer questions about different types of loans every day.


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