Differences between fixed and adjustable loans

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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, the majority your payment is applied to interest. This proportion gradually reverses as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Mutual Security Mortgage at (303) 931-7879 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.

The majority of ARMs are capped, which means they won't increase over a certain amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a 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. Additionally, almost all adjustable programs have a "lifetime cap" — this cap means that the rate can't exceed the cap percentage.

ARMs usually start at a very low rate that usually increases over time. 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. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for borrowers who anticipate moving within three or five years. These types of ARMs benefit people who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (303) 931-7879. We answer questions about different types of loans every day.

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