Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans vary little.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage goes to principal. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select 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 provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Coastal Mortgage Corp. at 504-866-5626 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest on ARMs are determined by a federal 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 ARM programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in one period. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature the lowest rates at the start. They usually guarantee the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on staying in the house longer than the initial low-rate period. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 504-866-5626. We answer questions about different types of loans every day.