Fixed versus adjustable loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans vary little.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage toward principal. The amount applied to your principal amount goes up gradually every month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Coastal Mortgage Corp. at 504-866-5626 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are normally adjusted every six months, based on various indexes.

Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan.

ARMs most often feature their lowest rates at the beginning of the loan. They provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed 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 adjust. Loans like this are usually best for people who anticipate moving within three or five years. These types of ARMs most benefit people who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on staying in the home for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.

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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