Differences between adjustable and fixed rate loans

With a fixed-rate loan, your payment never changes for the life of your mortgage. The portion that goes for principal (the actual loan amount) goes up, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance will increase over time, but generally, payments on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Bright Vision Mortgage at 9043423622 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages feature this cap, so they can't go up over a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. 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 period.

ARMs most often feature their lowest rates at the beginning of the loan. They usually guarantee 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 introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit people who plan to move before the loan adjusts.

Most people who choose ARMs do so 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 when property values decrease and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 9043423622. It's our job to answer these questions and many others, so we're happy to help!

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