Fixed versus adjustable loans
A fixed-rate loan features the same payment amount for the entire duration of your mortgage. The property taxes and homeowners insurance will go up over time, but for the most part, payments on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage goes to principal. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater 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 the best rate currently available. Call Bright Vision Mortgage at (904) 342-3622 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest rates on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs are capped, so they can't increase over a specific 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 go up in a given period. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often have the lowest, most attractive rates at the beginning of the loan. They usually provide that interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs are best for people who will move before the initial lock expires.
Most people who choose ARMs do so because they want to get lower introductory rates and don't plan on staying in the house 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 if they can't sell their home or refinance at the 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!