Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment for the entire duration of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay , more of your payment is applied to principal.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into 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 help you lock in a fixed-rate at the best rate currently available. Call Coastal Mortgage Corp. at 504-866-5626 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest for ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a "cap" that protects borrowers from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment won't increase beyond a fixed amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan.

ARMs most often feature the lowest rates toward the beginning. They usually guarantee that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of ARMs are best for people who will move before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the home longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell or refinance at the 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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