Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property taxes and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency 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 the best rate currently available. Call Coastal Mortgage Corp. at 504-866-5626 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages are capped, which means they won't go up over a certain amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment can't increase beyond a fixed amount in a given year. Most ARMs also cap your rate over the life of the loan.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.
You might choose an ARM to take advantage of a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values go down and borrowers are unable to sell their home or refinance.
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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