Differences between adjustable and fixed loans

With a fixed-rate loan, your payment stays the same for the entire duration of your mortgage. The portion allocated to principal (the loan amount) will increase, but your interest payment will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans vary little.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage goes to principal. The amount applied to your principal amount increases up gradually each month.

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 want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. 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 how we can help.

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

Most ARM programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs won't adjust more than two percent 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 your monthly payment can increase in one period. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs most often have the lowest, most attractive rates at the start. They usually guarantee the lower rate from a month to ten years. 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. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit people who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.

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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