Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment stays the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate loan will increase very little.

At the beginning of a a fixed-rate mortgage loan, the majority your payment goes toward interest. The amount paid toward your principal amount goes up slowly each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide 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 the best rate currently available. Call Ward Kilduff Mortgage at (860) 658-7100 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages feature this cap, which means they won't increase over a certain amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment will not go above a certain amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan period.

ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They usually guarantee the lower interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who expect to move within three or five years. These types of ARMs benefit people who will move before the loan adjusts.

You might choose an ARM to take advantage of a lower initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers are unable to 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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