Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on your fixed-rate loan will be very stable.
When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (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 help you lock in a fixed-rate at a favorable rate. Call Ward Kilduff Mortgage at (860) 658-7100 for details.
There are many kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are based on an outside 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 feature a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can go up in one period. Plus, the great majority of adjustable programs feature a "lifetime cap" — this means that the rate can't ever exceed the cap percentage.
ARMs most often feature their lowest rates toward the beginning. They usually guarantee that rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values go down and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at (860) 658-7100. It's our job to answer these questions and many others, so we're happy to help!
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