Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. That gradually reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Bright Vision Mortgage at (904) 342-3622 to learn more.
There are many kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by a federal index. A few of these 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 are capped, which means they won't increase above a certain amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment won't increase beyond a fixed amount in a given year. Additionally, the great majority of ARMs feature a "lifetime cap" — this means that your rate can't exceed the cap amount.
ARMs usually start at a very low rate that usually increases as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at (904) 342-3622. We answer questions about different types of loans every day.