Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The amount of the payment allocated for your principal (the amount you borrowed) will increase, but your interest payment will go down accordingly. The property tax and homeowners insurance will go up over time, but in general, payment amounts on these types of loans vary little.

Early in a fixed-rate loan, most of your payment goes toward interest, and a much smaller part goes to principal. The amount paid toward principal increases up slowly each month.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Hanson Planning Group at (303) 300-8601 for details.

There are many types of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have 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 a year, even though 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 directly, caps the amount your monthly payment can go up in one period. Plus, the great majority of ARM programs have a "lifetime cap" — the interest rate will never exceed the capped percentage.

ARMs most often have their lowest, most attractive rates toward the start. They provide 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 types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs are best for people who plan to move before the initial lock expires.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan on staying in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell or refinance at the lower property value.