Differences between fixed and adjustable loans

With a fixed-rate loan, your payment never changes for the life of your mortgage. The portion of the payment allocated for your principal (the actual loan amount) increases, however, your interest payment will go down accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on a fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay on the loan, more of your payment is applied to principal.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking 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 different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. 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 has a "payment cap" that guarantees that your payment can't go above a fixed amount in a given year. In addition, almost all ARMs feature a "lifetime cap" — the rate won't exceed the cap amount.

ARMs usually start out at a very low rate that may increase over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to get a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell 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!

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