Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
At the beginning of a a fixed-rate loan, the majority your payment is applied to interest. 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 interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Bright Vision Mortgage at (904) 342-3622 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest on ARMs are determined by an outside 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 ARM programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment can't increase beyond a fixed amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set 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. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on staying in the home longer than the introductory low-rate period. ARMs are risky if property values decrease and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at (904) 342-3622. We answer questions about different types of loans every day.