Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment stays the same for the life of your loan. The amount allocated for your principal (the actual loan amount) will go up, but the amount you pay in interest will go down in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on a fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion gradually reverses itself as the loan ages.

You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Ward Kilduff Mortgage at (860) 658-7100 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not go above a certain amount in a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — this means that the rate can't go over the cap percentage.

ARMs usually start out at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed 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 they adjust. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values decrease and borrowers can't sell their home or refinance.

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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