Fixed versus adjustable rate loans

With a fixed-rate loan, your payment never changes for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans don't increase much.

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

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Jim Dorney at (303) 443-5566 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than 2% 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 your payment can go up in a given period. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are best for people who anticipate moving within three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell or refinance with a lower property value.