Fixed versus adjustable loans

With a fixed-rate loan, your payment never changes for the life of the loan. The portion of the payment that goes to your principal (the amount you borrowed) will go up, but the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments for your fixed-rate loan will be very stable.

At the beginning of a a fixed-rate loan, the majority your payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer 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 Affinity Mortgage Brokers at 719-331-6278 to learn more.

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

Most programs feature a cap that protects borrowers from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment won't go above a fixed amount in a given year. Almost all ARMs also cap your rate over the duration of the loan.

ARMs most often feature their lowest, most attractive rates toward the beginning. They guarantee the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the loan adjusts.

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

Have questions about mortgage loans? Call us at 719-331-6278. It's our job to answer these questions and many others, so we're happy to help!

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