Differences between fixed and adjustable loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The amount allocated for principal (the amount you borrowed) will increase, but your interest payment will go down accordingly. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, most of the payment is applied to interest. The amount applied to principal goes up gradually every month.
Borrowers can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (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 assist you in locking a fixed-rate at the best rate currently available. Call Augusta Mortgage Solutions at 706-860-5514 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs feature this cap, which means they won't increase above a certain amount in a given period of time. Some ARMs won't adjust 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 directly, caps the amount the payment can increase in a given period. Additionally, the great majority of ARM programs feature a "lifetime cap" — this cap means that your interest rate will never exceed the capped amount.
ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for people who expect to move in three or five years. These types of ARMs are best for borrowers who will move before the loan adjusts.
You might choose an ARM to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers can't sell their home or refinance.
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!