Fixed versus adjustable rate loans

With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The portion allocated to your principal (the actual loan amount) will increase, but the amount you pay in interest will decrease accordingly. The property taxes 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 vary little.

When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. The amount paid toward your principal amount increases up slowly each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Ward Kilduff Mortgage at (860) 658-7100 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, 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 increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment will not increase beyond a fixed amount over the course of a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — this means that your rate won't exceed the cap percentage.

ARMs usually start at a very low rate that usually increases as the loan ages. 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 types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to remain in the house for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.

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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