Fixed versus adjustable rate loans

With a fixed-rate loan, your monthly payment stays the same for the entire duration of the loan. The amount allocated for principal (the amount you borrowed) goes up, but the amount you pay in interest will go down in the same amount. The property tax and homeowners insurance will go up over time, but in general, payments on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward principal goes up slowly each month.

You can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Ward Kilduff Mortgage at (860) 658-7100 to learn more.

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

Most ARM programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't go above a certain amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan period.

ARMs most often feature the lowest rates at the start. They guarantee that rate from a month to ten years. You may have heard 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 certain number of years (3 or 5), then they adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell 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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