Adjustable versus fixed rate loans
With a fixed-rate loan, your payment remains the same for the entire duration of your loan. The amount allocated for your principal (the loan amount) increases, however, the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance will go up over time, but in general, payments on these types of loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller percentage toward principal. The amount applied to your principal amount goes up slowly each month.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of 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 offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Community Trust Lending Team at Norcom Mortgage-NMLS ID#71655 at (203) 526-9345 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are normally adjusted every six months, based on various indexes.
The majority of ARMs feature this cap, which means they won't go up above a specified amount in a given period. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a certain amount in a given year. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often feature their lowest rates toward the beginning of the loan. They provide that rate from a month to ten years. You've likely heard of 5/1 or 3/1 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 they adjust. These loans are best for people who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.
You might choose an ARM to take advantage of a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (203) 526-9345. We answer questions about different types of loans every day.