Loans fall into two basic categories:
- Those that have fixed interest rates and payments
- Those with interest rates and payments that vary over time
A fixed-rate mortgage provides a known monthly payment that will remain the same throughout the life of the loan. This means housing costs will never vary and will be easy to budget. The interest rates on these loans are usually a little higher than adjustable loans since the lender is establishing a set interest for many years.
Adjustable-rate mortgage (ARM) loans generally give you the benefit of low initial interest rates and a corresponding lower monthly payment at the beginning of the loan term. The rates increase (or may even decrease) as the loan provides for periodic changes in interest rates. An important point to look for is the presence or absence of interest-rate “caps.” Life-of-the-loan caps place a ceiling on how high the rate can go over the term of the loan, often five to six percentage points above the original rate. They are a guarantee from the lender that you will not be required to pay more than the agreed upon maximum interest rate. Annual caps protect you from extreme jumps in the interest rate in any given year and are usually in the one to two percent range.
Shop around for your loan. Don’t be afraid to ask questions and to compare one loan to another. Since you will be living with it for many years, make sure to get best suited for your financial circumstances. For more information, consult with your Century 21® office.