Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment never changes for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but in general, payment amounts on these types of loans change little over the life of the loan.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part toward principal. That reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater 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 Ward Kilduff Mortgage at (860) 658-7100 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust every six months, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment can't increase beyond a fixed amount over the course of a given year. Additionally, almost all adjustable programs have a "lifetime cap" — this cap means that the interest rate can't ever exceed the cap percentage.

ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to remain in the house longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell or refinance with a lower property value.

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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