Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment amount over the life of the loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans vary little.

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part goes to principal. The amount applied to your principal amount increases up gradually each month.

Borrowers might 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 this low rate. For homeowners who have an 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 favorable rate. Call Milestone Mortgage a Division of The Mortgage Company at (303) 877-0415 to discuss your situation with one of our professionals.

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

The majority of ARMs feature this cap, which means they won't increase over a specified amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment will not go above a certain amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan.

ARMs most often feature their lowest rates toward the start of the loan. They guarantee the lower rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan on staying in the home for any longer than this introductory low-rate period. ARMs are risky when property values decrease and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at (303) 877-0415. We answer questions about different types of loans every day.

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