Adjustable versus fixed rate loans

With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The portion of the payment allocated to your principal (the amount you borrowed) goes up, but the amount you pay in interest will go down accordingly. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans don't increase much.

When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. The amount paid toward principal goes up gradually each month.

You might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of 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 offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking 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 every six months, based on various indexes.

Most ARMs feature this cap, so they won't increase above 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 if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment can't increase beyond a fixed amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan.

ARMs usually start out at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the house for any longer than the initial 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 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.

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