Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment doesn't change for the life of your loan. The portion allocated for your principal (the loan amount) will go up, but the amount you pay in interest will go down in the same amount. The property tax and homeowners insurance will go up over time, but generally, payments on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, most of your payment pays interest, and a much smaller part goes to principal. That reverses as the loan ages.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Bright Vision Mortgage at (904) 342-3622 to learn more.
There are many different types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are based on an outside index. Some examples of outside indexes 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.
Most ARMs are capped, which means they won't go up over a specific amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment will not go above a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at (904) 342-3622. We answer questions about different types of loans every day.