Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. 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 increase over time, but generally, payments on these types of loans change little over the life of the loan.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage goes to principal. The amount paid toward principal goes up gradually every month.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call MidTowne Mortgage at (478) 746-2063 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 you from sudden increases in monthly payments. 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 your payment can increase in a given period. Plus, the great majority of adjustable programs feature a "lifetime cap" — this cap means that the rate won't go over the cap amount.
ARMs most often feature the lowest rates at the start. They guarantee the lower rate from a month to ten years. 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 kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the house longer than the initial low-rate period. ARMs can be risky if property values decrease and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (478) 746-2063. It's our job to answer these questions and many others, so we're happy to help!