Adjustable versus fixed loans

With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The amount of the payment allocated for principal (the loan amount) will increase, but your interest payment will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans vary little.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount paid toward principal increases up slowly each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call Bright Vision Mortgage at (904) 342-3622 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, which means they can't go up above a specific amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment can't go above a fixed amount in a given year. The majority of ARMs also cap your rate over the life of the loan period.

ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit people who plan to move before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (904) 342-3622. We answer questions about different types of loans every day.

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