Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your mortgage. The amount of the payment allocated for your principal (the amount you borrowed) goes up, however, your interest payment will decrease in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments on a fixed-rate loan will be very stable.
At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. That reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Ward Kilduff Mortgage at (860) 658-7100 for details.
There are many different types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on a federal index. Some examples of outside indexes 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.
The majority of Adjustable Rate Mortgages are capped, so they won't go up over a specific amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment can't increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan.
ARMs usually start at a very low rate that usually increases over time. You may have heard 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 best for people who anticipate moving in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on staying in the home for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates 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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