Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment amount over the life of your loan. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans vary little.

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

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Ward Kilduff Mortgage at (860) 658-7100 for details.

There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, so they won't increase above a specified amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment will not increase beyond a fixed amount over the course of a given year. Plus, the great majority of ARMs have a "lifetime cap" — your rate can't ever go over the cap amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are best for borrowers who anticipate moving in three or five years. These types of ARMs benefit people who plan to move before the initial lock expires.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell or refinance with a lower property value.

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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