Adjustable versus fixed rate loans
With a fixed-rate loan, your payment never changes for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part goes to principal. That reverses as the loan ages.
You can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because 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 more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can 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, come in even more varieties. Generally, the interest for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in one period. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a lower initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 7068605514. It's our job to answer these questions and many others, so we're happy to help!