Adjustable versus Fixed Loans
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A fixed-rate loan features a fixed payment over the life of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. 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 these types of loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a great rate currently available. Call American Dream Mortgage at (720) 317-2500 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they can't go up above a specified amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment won't go above a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan on staying in the house longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (720) 317-2500. It's our job to answer these questions and many others, so we're happy to help!