Fixed versus adjustable loans

A fixed-rate loan features the same payment for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans don't increase much.

At the beginning of a a fixed-rate loan, most of the payment is applied to interest. The amount paid toward your principal amount increases up slowly every month.

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

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

Most ARMs feature this cap, so they can't go up over a certain amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in one period. Almost all ARMs also cap your rate over the duration of the loan period.

ARMs usually start at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low introductory rate and count 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 or refinance their loan.

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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