Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on these types of loans change little over the life of the loan.

At the beginning of a a fixed-rate mortgage loan, the majority your payment goes 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. People choose fixed-rate loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in 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 kinds of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, which means they won't increase over a specific amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. In addition, the great majority of ARMs have a "lifetime cap" — this means that the rate can't ever go over the cap amount.

ARMs most often feature their lowest rates at the start. They usually guarantee the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell their home 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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