Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on these types of loans don't increase much.

At the beginning of a a fixed-rate loan, the majority the payment goes toward interest. This proportion reverses as the loan ages.

Borrowers might 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 lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more stability in monthly payments. 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.

There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

The majority of ARMs feature this cap, which means they can't go up over a certain amount in a given period. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment won't increase beyond a fixed amount over the course of a given year. Plus, the great majority of ARM programs feature a "lifetime cap" — this means that the interest rate can't ever go over the cap amount.

ARMs most often feature the lowest rates toward the start of the loan. They usually provide that rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed 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 adjust. Loans like this are usually best for people who expect to move in three or five years. These types of ARMs are best for people who will move before the initial lock expires.

You might choose an ARM to get a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers can't sell their home or refinance their loan.

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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