Adjustable versus fixed loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate loan will increase very little.
When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. That reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Augusta Mortgage Solutions at 706-860-5514 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest rates for ARMs are determined by a federal index. Some examples of outside indexes 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 ARMs feature this cap, so they won't increase over a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment will not increase beyond a fixed amount in a given year. In addition, the great majority of ARMs feature a "lifetime cap" — this cap means that your interest rate can never go over the cap percentage.
ARMs usually start out at a very low rate that may increase as the loan ages. 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. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers can't sell or refinance their loan.
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!