Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on these types of loans don't increase much.
When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. This proportion reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of 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 currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call Amity Mortgage LLC at (203) 729-6681 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the index the rate is based on 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. Additionally, the great majority of adjustable programs have a "lifetime cap" — the interest rate can't go over the cap amount.
ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They guarantee the lower rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they cannot sell 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!