Fixed versus adjustable rate loans
A fixed-rate loan features the same payment amount over the life of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage toward principal. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (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 help you lock in a fixed-rate at a good rate. Call Ward Kilduff Mortgage at (860) 658-7100 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can go up in one period. In addition, the great majority of ARMs have a "lifetime cap" — this cap means that your rate won't exceed the capped percentage.
ARMs most often have their lowest rates toward the start. They usually provide that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers are unable to sell 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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