Differences between adjustable and fixed rate loans

With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate mortgage will increase very little.

During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage goes to principal. The amount paid toward your principal amount increases up gradually every month.

Borrowers might choose a fixed-rate loan to lock in a low 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 into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Bright Vision Mortgage at (904) 342-3622 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest on ARMs are determined by an outside index. A few of these 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 ARMs are capped, which means they can't go up above a specific amount in a given period. 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 per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't go above a fixed amount over the course of a given year. In addition, almost all adjustable programs feature a "lifetime cap" — the interest rate can't go over the cap amount.

ARMs most often feature their lowest rates at the start of the loan. They guarantee the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to remain in the house longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell their home 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!

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