At Nutter, we offer a variety of mortgage programs to suit each homeowner’s specific needs. In choosing which type of mortgage is best for you, one of the most important features to consider is the type of interest rate that will be used - a fixed rate or an adjustable rate.
Fixed Rate is just what the name implies - the interest rate for your monthly principal and interest payment (P&I) remains the same for the duration of your loan. Homeowners who prefer stability and certainty in their mortgage payment will often choose a fixed rate option, as well as those homeowners who wish to avoid the risk of higher interest rates in the future.
Adjustable Rate Mortgages (ARMs) are 30-year loans in which the borrower makes an initial monthly principal & interest payment (P&I) for a period of 1, 3, 5, 7, or 10 years, depending on which ARM option you choose. The interest rate during this initial period is usually lower than that of a fixed rate loan, which is one of the many benefits of choosing an ARM.
At the end of the 1, 3, 5, 7, or 10-year period, your adjustable rate mortgage “adjusts” up or down each year thereafter based on market conditions. Each year, the amount of your interest rate is determined by adding the Index (e.g., 1-year LIBOR rate) plus a Margin (e.g., 2% or 2.25%).
ARMs usually offer some savings over fixed rate mortgages earlier in the loan term. However, what happens if interest rates start to increase?
Fortunately, ARMs are capped - giving you some built-in protection by limiting how much your interest rate can go up or down each year (2% for Conventional ARMs, 1% for FHA/VA ARMs), and over the life of the loan (6% for Conventional ARMs, 5% for FHA/VA ARMs).