Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The amount of the payment that goes to principal (the actual loan amount) will increase, but the amount you pay in interest will decrease accordingly. The property tax and homeowners insurance will increase over time, but in general, payments on these types of loans don't increase much.
When you first take out a fixed-rate loan, the majority your payment goes toward interest. This proportion gradually reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Augusta Mortgage Solutions at 7068605514 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs have a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can increase in one period. Plus, almost all ARM programs feature a "lifetime cap" — this means that your rate can't ever go over the cap percentage.
ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 7068605514. We answer questions about different types of loans every day.