Differences between fixed and adjustable loans
With a fixed-rate loan, your payment stays the same for the entire duration of your mortgage. The amount allocated for principal (the loan amount) goes up, however, your interest payment will go down in the same amount. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. This proportion gradually reverses itself as the loan ages.
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 want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Bright Vision Mortgage at (904) 342-3622 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.
Most programs feature a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment can't increase beyond a certain amount over the course of a given year. Plus, almost all ARM programs feature a "lifetime cap" — the rate won't go over the capped amount.
ARMs most often have their lowest, most attractive rates at the beginning. They provide that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who will move before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (904) 342-3622. It's our job to answer these questions and many others, so we're happy to help!