Differences between adjustable and fixed loans

With a fixed-rate loan, your payment never changes for the life of your mortgage. The portion of the payment allocated for principal (the actual loan amount) increases, but your interest payment will go down accordingly. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans vary little.

When you first take out a fixed-rate loan, the majority your payment is applied to interest. The amount applied to your principal amount goes up slowly each month.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. 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. Generally, interest for ARMs are determined by an outside 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 monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment can't go above a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start out at a very low rate that may increase over time. You've probably read about 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 kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will move before the initial lock expires.

You might choose an ARM to take advantage of a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell 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.

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