Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment remains the same for the entire duration of the loan. The portion allocated to your principal (the loan amount) increases, however, the amount you pay in interest will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments for a fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan are applied mostly to pay 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 rate. People choose these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (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'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Augusta Mortgage Solutions at 706-860-5514 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest on ARMs are determined by an outside index. A few of these 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 feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment won't increase beyond a fixed amount over the course of a given year. In addition, the great majority of ARM programs have a "lifetime cap" — this means that the interest rate will never go over the capped 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. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and don't plan on staying in the house for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 706-860-5514. We answer questions about different types of loans every day.