Differences between adjustable and fixed loans
With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. This proportion gradually reverses as the loan ages.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Coastal Mortgage Corp. at 504-866-5626 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most ARMs feature this cap, which means they can't increase over a specific amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment won't increase beyond a certain amount over the course of a given year. Additionally, the great majority of ARM programs feature a "lifetime cap" — the interest rate can't ever exceed the cap percentage.
ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan to stay in the home longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up 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!
Get a New Loan Quote
Looking for a new home loan? Fill out the following form to get a fast quote from us.