Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment stays the same for the life of your mortgage. The amount allocated for principal (the actual loan amount) increases, but the amount you pay in interest will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate loan, most of your payment goes toward interest. The amount applied to your principal amount goes up gradually each month.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Augusta Mortgage Solutions at 7068605514 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest for ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages are capped, so they can't go up above a specified amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. In addition, the great majority of ARMs have a "lifetime cap" — this means that your interest rate can't ever go over the capped percentage.
ARMs most often have the lowest rates toward the start. They guarantee that interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will move before the loan adjusts.
You might choose an ARM to get a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky when property values decrease and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at 7068605514. We answer questions about different types of loans every day.