Adjustable versus fixed loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on your fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller percentage goes to principal. This proportion gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. 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, interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the underlying index goes up 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 increase in a given period. Additionally, the great majority of ARMs feature a "lifetime cap" — this means that the rate can't ever go over the cap amount.
ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking 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 kinds of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs benefit people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the house for any longer than the initial 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. It's our job to answer these questions and many others, so we're happy to help!