Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Community Trust Lending Team at Norcom Mortgage-NMLS ID#71655 at (203) 526-9345 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment will not go above a fixed amount in a given year. Plus, the great majority of adjustable programs feature a "lifetime cap" — this cap means that your interest rate won't go over the cap percentage.
ARMs most often feature their lowest rates toward the start. They guarantee that rate from a month to ten years. You've probably read about 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. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers are unable to sell their home 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.