Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment amount over the life of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. That reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into 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 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment will not increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.
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 initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on staying in the home for any longer than the introductory low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell their home or refinance their loan.
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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