When you make a big decision like investing in real estate, accurate and thorough information is a must.
A well-informed decision, and thus a well-informed investment, is possible by understanding the anatomy of a loan and its factors that determine how much a loan will cost you.
There are many components to a loan, and perhaps one of the least understood is the differentiation between a fixed-rate and adjustable-rate mortgage.
Let’s break them down here:
With a traditional fixed-rate loan, the monthly principal and interest rate go unchanged through the maturation of the loan (unless, of course, you refinance). But there are other exceptions. For instance, an impound account will collect money each month for prorated costs for property taxes or homeowners’ insurance. If and when property taxes change, the amount due will adjust accordingly.
Borrowers may select from 10- to 30-year loan terms under a fixed-rate program. While early payments are not penalized, the loan is amortized, or set up, so that it will be paid off by the maturation date. In short, consumers who opt for a fixed-rate loan can expect steady and predictable patterns to the way they pay for their mortgages.
As the name suggests, the primary difference with an adjustable-rate mortgage is that the interest rate paid can change. This is how it works: For an initial period of time, the interest rate paid will remain consistent then adjust based on market conditions.
The benefit is that the initial rate for an adjustable-rate mortgage will be lower than that offered by a fixed-rate mortgage. This feature offers borrowers the flexibility to come in at a lower rate and plan for the eventual hike.
These loans have a margin and an index. Margins for these loans can range from 1.75 percent to 3.5 percent, but it’ll vary on the amount financed in relation to the property’s value. The index is the financial instrument, such as a treasury security, that is tied to the loan.
At the point when the mortgage adjusts, the margin is added to the index and rounded to produce the new rate.
While adjustments can occur annually, these types of loans do have their limits on how much rates can adjust.
Borrowers should also keep in mind that adjustable-rate loans can be converted to fixed-rate loans for a fee.
Whether you’re thinking of buying a home in Roseville, or, you’re thinking of refinancing, please do not hesitate to contact us to learn more about these two different kinds of loans.