Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay on the loan, more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Bright Vision Mortgage at (904) 342-3622 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most ARMs are capped, so they can't increase over a specific amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in one period. Almost all ARMs also cap your interest rate over the life of the loan.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed 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 often best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who will move before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to stay in the house for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell 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.