Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment for the entire duration of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, 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 mostly to pay interest. That reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad 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.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, which means they can't increase over a certain amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment will not go above a certain amount over the course of a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — your rate won't go over the cap amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are usually best for people who anticipate moving in three or five years. These types of ARMs most benefit people who plan to move before the loan adjusts.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the house longer than the introductory low-rate period. ARMs are risky when property values decrease and borrowers are unable to sell their home or refinance their loan.

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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