Fixed versus adjustable loans

A fixed-rate loan features a fixed payment over the life of the loan. The property taxes and homeowners insurance will increase over time, but generally, payments on these types of loans change little over the life of the loan.

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

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Mountain Equity Mortgage, Inc. at 970-513-0934 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, so they can't go up above a certain amount in a given period. 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 a year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in a given period. Plus, almost all adjustable programs feature a "lifetime cap" — the interest rate can't go over the capped amount.

ARMs usually start out at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are best for people who expect to move within three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 970-513-0934. We answer questions about different types of loans every day.