Fixed versus adjustable rate loans
A fixed-rate loan features the same payment over the life of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on fixed rate loans don't increase much.
When you first take out a fixed-rate loan, most of your payment goes toward interest. This proportion gradually reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Coastal Mortgage Corp. at 504-866-5626 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't go above a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the life 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 initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are often best for people who expect to move within three or five years. These types of ARMs benefit people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on remaining in the house longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be 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 504-866-5626. It's our job to answer these questions and many others, so we're happy to help!
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