Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment remains the same for the life of the mortgage. The portion allocated for principal (the loan amount) increases, however, the amount you pay in interest will go down accordingly. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. That gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can 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 learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
The majority of ARMs are capped, so they won't go up over a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment won't increase beyond a certain amount in a given year. Additionally, the great majority of ARMs have a "lifetime cap" — this means that the interest rate won't go over the cap amount.
ARMs usually start at a very low rate that usually increases over time. You may have heard 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 adjust. These loans are best for borrowers who expect to move in three or five years. These types of ARMs benefit borrowers who plan to move before the loan adjusts.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell their home or refinance at the lower property value.
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!