Fixed versus adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of the mortgage. 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, a large percentage of your payment pays interest, and a significantly smaller percentage goes to principal. The amount applied to principal goes up gradually each month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Bright Vision Mortgage at (904) 342-3622 for details.
There are many different types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though 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 that the payment can increase in a given period. Additionally, the great majority of ARM programs feature a "lifetime cap" — this cap means that your rate can never go over the capped percentage.
ARMs most often have the lowest, most attractive rates at the beginning. They guarantee that interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit people who will move before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan on staying in the home for any longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance their loan.
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!