Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go primarily toward interest. That gradually reverses itself as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in 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 have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Amity Mortgage LLC at (203) 729-6681 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment won't go above a fixed amount over the course of a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — this means that the interest rate won't exceed the capped amount.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 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 certain 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 plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at (203) 729-6681. It's our job to answer these questions and many others, so we're happy to help!