Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment stays the same for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward principal increases up gradually each month.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call STELLAR mortgage corporation at (678) 539-8100 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates on ARMs are determined by a federal index. Some examples of outside indexes 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 Adjustable Rate Mortgages are capped, so they won't increase over a certain amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment won't increase beyond a certain amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature their lowest, most attractive rates at the start of the loan. They provide the lower interest rate from a month to ten years. You've probably read about 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. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will move before the initial lock expires.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on staying in the house longer than the initial low-rate period. ARMs are risky if property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (678) 539-8100. It's our job to answer these questions and many others, so we're happy to help!