Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment over the life of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly toward interest. This proportion reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. 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.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust every six months, based on various indexes.

The majority of ARMs are capped, which means they can't increase over a certain 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 two percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in a given period. In addition, almost all ARMs feature a "lifetime cap" — this means that your interest rate can't exceed the cap percentage.

ARMs most often have the lowest rates at the start. They provide that rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for people who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell their home or refinance with a 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!

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