Differences between fixed and adjustable rate loans

With a fixed-rate loan, your monthly payment never changes for the life of your loan. The portion that goes for your principal (the loan amount) goes up, however, your interest payment will decrease in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for your fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with 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 good rate. Call Amity Mortgage LLC at (203) 729-6681 to discuss how we can help.

There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most programs have a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though 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 increase beyond a certain amount over the course of a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — this cap means that the rate won't go over the capped amount.

ARMs most often feature the lowest, most attractive rates toward the beginning. They guarantee the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory 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. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.

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