Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed 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 monthly payments on a fixed-rate loan will be very stable.

At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Mac 5 Mortgage at 970-625-8686 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, which means they won't go up over a specific amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment will not go above a fixed amount in a given year. Plus, the great majority of ARM programs have a "lifetime cap" — the rate can't go over the capped percentage.

ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit people who will move before the initial lock expires.

Most people who choose ARMs do so when they want to get lower introductory rates and don't plan on staying in the house longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 970-625-8686. It's our job to answer these questions and many others, so we're happy to help!

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