Fixed Rate versus Adjustable Rate

There are a few things to understand when you are considering mortgage types for a Connecticut home. One of the most important is a fixed rate versus adjustable rate mortgage.

Fixed Rate Mortgage means that the interest rate for the full term of the mortgage is locked and cannot change. This principal and interest portion of the loan will remain the same during the repayment of your mortgage over the life of the loan. Although your monthly escrow payment may fluctuate based on increases in taxes and insurance, the monthly payment associated with the repayment of the outstanding mortgage balance remains fixed.

Adjustable Rate Mortgage (ARM) traditionally has a lower interest rate at the beginning of the mortgage which changes over time based on an index. There are many types of adjustable rate mortgages and the terms of the payment change are based on the specifics of the adjustable rate mortgage product you select. ARMs have a low and high limit on how much your payment can change over a period of time and the term of your loan. The perception is that over an extended period of time ARM loans will have lower interest expenses than fixed rate loans. To get this benefit, you must be willing to live with both changes up and down in your interest rate and your payment. If you’re comfortable with this uncertainty, then there is a good chance that you can save on your interest expense. ARMs have always attracted buyers who expect to be in the house for only a few years. For example, the interest rate on a 5/1 ARM is set for the first five years and is then adjusted annually thereafter. If you know you are going to stay in the home for no longer than five years, reaping the benefits of the low rate the first five years makes sense.

Posted in: Learn more about: