Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment for the entire duration of your mortgage. The property tax 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 don't increase much.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part toward principal. As you pay on the loan, more of your payment goes toward principal.

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 wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Affinity Mortgage Brokers at 719-425-2226 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.

Most ARMs are capped, so they won't increase over a specific amount in a given period. Some ARMs won't adjust 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 rate directly, caps the amount that the payment can increase in a given period. Most ARMs also cap your interest rate over the life of the loan.

ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the home for any longer than the introductory low-rate period. ARMs are risky if property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 719-425-2226. It's our job to answer these questions and many others, so we're happy to help!


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