Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment stays the same for the life of the loan. The portion allocated for your principal (the amount you borrowed) goes up, however, the amount you pay in interest will go down accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on a fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part toward principal. That reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when 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 currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Ward Kilduff Mortgage at (860) 658-7100 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they won'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 two percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment won't increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an ARM to get a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values go down and borrowers can't sell their home or refinance.
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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