Adjustable versus fixed rate loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate loan will be very stable.
When you first take out a fixed-rate loan, the majority your payment goes toward interest. The amount applied to your principal amount goes up slowly every month.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Ward Kilduff Mortgage at (860) 658-7100 for details.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment won't increase beyond a certain amount in a given year. Plus, the great majority of ARM programs feature a "lifetime cap" — this means that the rate won't go over the capped amount.
ARMs usually start at a very low rate that may increase over time. 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. It then adjusts every year. These types 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 in three or five years. These types of adjustable rate loans are best for people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to stay in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot 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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