Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of your mortgage. The amount that goes for principal (the amount you borrowed) will increase, but the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, most of your payment pays interest, and a much smaller part toward principal. As you pay on the loan, more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Amity Mortgage LLC at (203) 729-6681 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted every six months, 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 go up in one period. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in a given period. Additionally, the great majority of ARMs feature a "lifetime cap" — this means that your interest rate won't exceed the capped percentage.
ARMs most often have their lowest, most attractive rates at the beginning of the loan. They guarantee that interest rate from a month to ten years. You may hear people talking 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 loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will move before the initial lock expires.
You might choose an ARM to get a very low introductory rate and count 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 could be stuck with increasing rates if they cannot 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!