Adjustable versus fixed loans
A fixed-rate loan features the same payment amount for the entire duration of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part goes to principal. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in 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 have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Bright Vision Mortgage at (904) 342-3622 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the 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 Adjustable Rate Mortgages feature this cap, which means they won't go up over a specific amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. Plus, almost all ARM programs have a "lifetime cap" — the interest rate can't go over the capped amount.
ARMs most often have their lowest, most attractive rates toward the start. They usually guarantee the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at (904) 342-3622. We answer questions about different types of loans every day.