Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the life of the loan. The portion of the payment allocated to principal (the actual loan amount) will go up, however, the amount you pay in interest will go down accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for your fixed-rate loan will increase very little.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward principal. That gradually reverses itself as the loan ages.
Borrowers 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 want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad 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 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in a given period. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often feature the lowest, most attractive rates toward the beginning. They guarantee the lower rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial 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 adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values decrease and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at (203) 526-9345. It's our job to answer these questions and many others, so we're happy to help!