Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment stays the same for the life of the mortgage. The portion allocated for principal (the actual loan amount) will increase, however, the amount you pay in interest will decrease in the same amount. The property tax 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.
At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. The amount paid toward your principal amount goes up gradually every month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Amity Mortgage LLC at (203) 729-6681 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most programs feature a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment can't go above a fixed amount in a given year. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of ARMs benefit people who will move before the initial lock expires.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to stay in the house longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (203) 729-6681. We answer questions about different types of loans every day.