Adjustable versus fixed loans

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A fixed-rate loan features a fixed payment amount over the life of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for a fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount paid toward your principal amount goes up gradually every month.

You 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. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Paragon Mortgage Services, Inc. at 303.727.2466 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, which means they won't go up over a specific amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment won't go above a certain amount over the course of a given year. Additionally, almost all ARM programs have a "lifetime cap" — the interest rate can never exceed the capped percentage.

ARMs most often feature their lowest, most attractive rates toward the start of the loan. They usually provide that interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In 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 number of years (3 or 5), then adjust. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 303.727.2466. We answer questions about different types of loans every day.