Differences between adjustable and fixed loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The amount allocated to principal (the actual loan amount) increases, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans don't increase much.
At the beginning of a a fixed-rate loan, most of your payment goes toward interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Bright Vision Mortgage at (904) 342-3622 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are normally adjusted every six months, based on various indexes.
The majority of ARMs feature this cap, so they can't increase over a specified amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in a given period. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often have their lowest rates at the start. They provide the lower interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (904) 342-3622. We answer questions about different types of loans every day.