Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment over the life of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments on your fixed-rate loan will increase very little.

When you first take out a fixed-rate loan, the majority the payment is applied to interest. This proportion reverses as the loan ages.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Ward Kilduff Mortgage at (860) 658-7100 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, which means they won't increase above a specified amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in a given period. Most ARMs also cap your rate over the duration of the loan.

ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of ARMs benefit people who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the house longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at (860) 658-7100. We answer questions about different types of loans every day.

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