Differences between fixed and adjustable loans

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A fixed-rate loan features the same payment over the life of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for your fixed-rate loan will increase very little.

During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a significantly smaller percentage goes to principal. The amount paid toward principal goes up slowly every month.

You can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Gateway Mortgage Denver at 720-440-9741 to learn more.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most ARM programs feature a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. In addition, almost all ARMs feature a "lifetime cap" — this means that your rate will never exceed the capped percentage.

ARMs most often have their lowest rates at the beginning of the loan. They guarantee that rate from a month to ten years. You may have heard 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 number of years (3 or 5), then adjust. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the initial lock expires.

You might choose an ARM to get a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky when property values decrease and borrowers are unable to sell or refinance their loan.

Have questions about mortgage loans? Call us at 720-440-9741. We answer questions about different types of loans every day.