Differences between adjustable and fixed loans

A fixed-rate loan features the same payment over the life of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans don't increase much.

When you first take out a fixed-rate loan, the majority the payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Ward Kilduff Mortgage at (860) 658-7100 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a cap that protects you from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in a given period. Plus, almost all ARMs have a "lifetime cap" — this means that your rate can't ever exceed the cap amount.

ARMs usually start out at a very low rate that may increase over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of ARMs most benefit people who plan to move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than this introductory low-rate period. ARMs are risky if property values go down and borrowers are unable to 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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