Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment over the life of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts for a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an 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 favorable rate. Call Coastal Mortgage Corp. at 504-866-5626 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, 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 increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment will not increase beyond a fixed amount in a given year. In addition, almost all ARM programs have a "lifetime cap" — your rate can't ever exceed the cap percentage.
ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set 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 borrowers who expect to move within three or five years. These types of adjustable rate loans are best for people who plan to move before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and don't plan on staying in the home for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 504-866-5626. We answer questions about different types of loans every day.
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