Adjustable versus fixed loans
A fixed-rate loan features the same payment amount for the entire duration of your loan. The property tax and homeowners insurance will go up over time, but generally, payments on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage toward principal. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Coastal Mortgage Corp. at 504-866-5626 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest on ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment can't go above a certain amount in a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — this means that the interest rate will never go over the cap amount.
ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 504-866-5626. We answer questions about different types of loans every day.