Adjustable versus fixed loans

A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance will increase over time, but generally, payments on these types of loans vary 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.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Coastal Mortgage Corp. at 504-866-5626 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

Most ARMs are capped, so they can't increase over a certain amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in a given period. Almost all ARMs also cap your rate over the life of the loan period.

ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of ARMs are best for people who will sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance their loan.

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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