Major types of mortgage loans include:
- Fixed-rate loans. Because they offer a monthly payment that is known and does not change, fixed-rate mortgage loans remain the most popular type. Most fixed-rate mortgages are for loan terms of 15 or 30 years. A 30-year loan has lower payments but a slightly higher interest rate. To pay off a fixed-rate loan sooner, check with your lender to make sure you can make prepayments. You should be allowed to make these anytime and for any amount, and at no penalty.
- Adjustable-rate loans. After an initial term, the interest rate on an adjustable-rate mortgage (ARM) loan is reset periodically. This is to keep the rate in line with current market interest rates. For example, a 7/6 ARM loan offers a fixed rate for the first seven years, adjusting every six years thereafter. A 10/6 ARM loan offers a fixed rate for the first ten years, adjusting every six years thereafter. The lender sets the interest rate by adding a margin to an index rate. Common indexes include:
- SOFR Index. The Federal Reserve Bank of New York publishes the Secured Overnight Financing Rate (SOFR) based on investors’ transactions in the treasury repurchase market (repo). In this market, investors trade daily, offering borrowers overnight loans backed by their U.S. Treasury bond assets. For more information on the SOFR index, visit www.newyorkfed.org and https://sf.freddiemac.com/working-with-us/origination-underwriting/mortgage-products/sofr-indexed-arms#:~:text=The%20Secured%20Overnight%20Financing%20Rate,their%20U.S.%20Treasury%20bond%20assets.
Most ARM loans have a periodic rate cap and lifetime cap to limit the amount the interest rate can increase each adjustment period and over the loan term, respectively.
If you have a payment cap in your loan agreement, you may face negative amortization of your loan. This has the effect of increasing the amount you owe.
BankSouth Mortgage offers a wide range of home ownership loan options. Check with one of our loan officers, who can help determine what’s best for you.