Differences between fixed and adjustable loans
With a fixed-rate loan, your payment remains the same for the entire duration of your loan. The portion allocated to your principal (the loan amount) will increase, however, your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments for your fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller percentage goes to principal. The amount applied to principal increases up slowly each month.
Borrowers might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Augusta Mortgage Solutions at 706-860-5514 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.
The majority of ARMs are capped, so they won't increase over a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment can't go above a certain amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They guarantee the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan to remain in the home longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 706-860-5514. We answer questions about different types of loans every day.