Differences between fixed and adjustable loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the loan. The portion of the payment that goes for your principal (the amount you borrowed) increases, but your interest payment will decrease accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for a fixed-rate loan will be very stable.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage toward principal. The amount paid toward your principal amount goes up slowly every month.
Borrowers 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 wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Amity Mortgage LLC at (203) 729-6681 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs are capped, so they can't increase above a specified amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment won't go above a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (203) 729-6681. We answer questions about different types of loans every day.