Differences between adjustable and fixed loans
With a fixed-rate loan, your payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments on a fixed-rate loan will increase very little.
When you first take out a fixed-rate mortgage loan, the majority the payment goes toward interest. The amount applied to your principal amount increases up gradually each month.
You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking 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.
There are many different types of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs are capped, which means they won't increase above a specific amount in a given period. There may be a cap on interest rate increases over the course of a year. 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. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature their lowest, most attractive rates at the beginning. They usually provide that interest rate for an initial period that varies greatly. You may have heard 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 a number of years (3 or 5), then they adjust. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the house longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't 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.