Fixed versus adjustable rate loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The portion allocated for your principal (the loan amount) will go up, but the amount you pay in interest will go down in the same amount. The property tax and homeowners insurance will increase over time, but generally, payments on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount applied to your principal amount increases up slowly each month.

You might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Chattahoochee Residential Mortgage, LLC at 4702755627 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages feature this cap, so they can't increase above a specific amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in one period. Most ARMs also cap your rate over the duration of the loan.

ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They provide that rate for an initial period that varies greatly. 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 a certain number of years (3 or 5), then adjust after the initial period. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the home longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 4702755627. It's our job to answer these questions and many others, so we're happy to help!