Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate mortgage will be very stable.

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

You might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Hamlet Financial Corporation at (970) 300-2115 to discuss how we can help.

There are many different kinds of Adjustable Rate Mortgages. ARM's usually adjust twice a year, based on various indexes.

Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't go above a fixed amount over the course of a given year. Almost all ARM's also cap your interest rate over the life of the loan.

ARM's most often feature the lowest rates at the start of the loan. They usually guarantee the lower rate from a month to ten years. You may have heard about "3/1 ARM's" or "5/1 ARM's". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARM's choose them when they want to take advantage of lower introductory rates and don't plan to remain in the house longer than this initial low-rate period. ARM's can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.