Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment amount over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for a fixed-rate loan will be very stable.

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

You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Affinity Mortgage Brokers at 719-425-2226 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest on ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a cap that protects you 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 though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment won't go above a certain amount in a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — the interest rate will never exceed the cap amount.

ARMs usually start at a very low rate that may increase over time. You've probably 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 kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who anticipate moving 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 get a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance with a lower property value.

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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