Fixed versus adjustable loans

A fixed-rate loan features a fixed payment over the life of the loan. The property taxes and homeowners insurance will go up over time, but generally, 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 go primarily to pay interest. That reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency 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 to discuss how we can help.

There are many 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 won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in a given period. Additionally, almost all ARM programs have a "lifetime cap" — the interest rate won't go over the capped percentage.

ARMs most often feature the lowest rates at the beginning of the loan. They usually provide the lower interest rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set 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 best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on staying in the home longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if 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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