Fixed versus adjustable loans
A fixed-rate loan features the same payment over the life of the loan. The property tax and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount applied to your principal amount increases up slowly every month.
You can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to 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 usually adjust twice a year, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in one period. In addition, almost all ARMs feature a "lifetime cap" — this cap means that your interest rate can never exceed the capped percentage.
ARMs most often have their lowest, most attractive rates at the start of the loan. They guarantee the lower interest rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for people who expect to move within three or five years. These types of ARMs benefit borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell their home or refinance with a lower property value.
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!