Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment amount over the life of your mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. 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 go mostly to pay interest. The amount applied to principal increases up slowly each month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Augusta Mortgage Solutions at 706-860-5514 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest on ARMs are based on a federal 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 ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in a given period. Most ARMs also cap your rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who expect to move in three or five years. These types of ARMs benefit people who will 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 do not plan on remaining in the home longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell their home or refinance at the 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!