Adjustable versus fixed loans

With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The amount allocated to your principal (the actual loan amount) increases, however, the amount you pay in interest will decrease in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans vary little.

When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. The amount paid toward principal goes up gradually each month.

You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Aspen Financial Group, Inc. at (303) 369-5033 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust every six months, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, so they can't increase over a certain amount in a given period of time. There may be a cap on interest rate variances over the course of a year. 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. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in a given period. Plus, almost all adjustable programs feature a "lifetime cap" — the rate won't exceed the capped amount.

ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial 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 after the initial period. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who will move before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell their home or refinance with a lower property value.