Differences between fixed and adjustable loans
With a fixed-rate loan, your payment never changes for the entire duration of the loan. The portion of the payment allocated for your principal (the amount you borrowed) will increase, however, your interest payment will go down accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate loan will increase very little.
At the beginning of a a fixed-rate loan, most of your payment is applied to interest. This proportion reverses as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Amity Mortgage LLC at (203) 729-6681 for details.
There are many types of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
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 a couple percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs most often feature their lowest, most attractive rates at the start. They provide the lower rate for an initial period that varies greatly. 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. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who plan to move 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 simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell or refinance at the 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!