Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment amount for the entire duration of the mortgage. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount applied to principal goes up slowly each month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in 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'll be glad to assist you in locking a fixed-rate at a good rate. Call Community Trust Lending Team at Norcom Mortgage-NMLS ID#71655 at (203) 526-9345 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARMs feature this cap, so they won't increase 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 has a "payment cap" that ensures that your payment can't increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than this initial low-rate period. ARMs are risky when property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at (203) 526-9345. We answer questions about different types of loans every day.