Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment amount over the life of the mortgage. The property taxes and homeowners insurance will increase over time, but generally, payment amounts on these types of loans don't increase much.

Early in a fixed-rate loan, most of your payment pays interest, and a significantly smaller percentage toward principal. 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 interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (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 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs are capped, which means they won't increase over a specified amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in one period. Almost all ARMs also cap your interest rate over the duration of the loan.

ARMs most often have the lowest rates at the start of the loan. They provide that 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 initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for borrowers who expect to move in three or five years. These types of ARMs benefit people who plan to move before the initial lock expires.

Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the home for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell or refinance at the lower property value.

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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