Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of your loan. 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 don't increase much.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. That reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Bright Vision Mortgage at (904) 342-3622 for details.

There are many types of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a cap that protects you from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment can't go above a fixed amount in a given year. In addition, the great majority of ARM programs have a "lifetime cap" — your rate can't exceed the cap amount.

ARMs most often feature their lowest rates at the beginning of the loan. They guarantee the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down 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. We answer questions about different types of loans every day.

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