Adjustable versus fixed loans

A fixed-rate loan features a fixed payment amount over the life of the loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan go mostly toward interest. This proportion reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Amity Mortgage LLC at (203) 729-6681 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment won't increase beyond a certain amount in 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 usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at (203) 729-6681. We answer questions about different types of loans every day.

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