Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments for your fixed-rate loan will be very stable.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage goes to principal. The amount paid toward your principal amount increases up slowly each month.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Ward Kilduff Mortgage at (860) 658-7100 to discuss how we can help.

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

The majority of ARMs feature this cap, so they can't increase over a specific amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't go above a certain amount over the course of a given year. In addition, almost all ARM programs feature a "lifetime cap" — this cap means that the rate won't exceed the cap percentage.

ARMs usually start out at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory 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 adjust. These loans are often best for people who expect to move within three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on staying in the home longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers cannot sell or refinance their loan.

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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