Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Ward Kilduff Mortgage at (860) 658-7100 to learn more.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment won't increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your interest rate over the life of the loan.

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 set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who will move before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan on staying in the house longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers cannot sell 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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