Fixed versus adjustable loans
With a fixed-rate loan, your payment remains the same for the life of your loan. The longer you pay, the more of your payment goes toward principal. 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.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller part toward principal. That reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more 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 a favorable rate. Call Augusta Mortgage Solutions at 706-860-5514 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest on ARMs are determined by an outside 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 ARM programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can go up in a given period. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 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 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 are best for borrowers who plan to move before the loan adjusts.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 706-860-5514. It's our job to answer these questions and many others, so we're happy to help!