Fixed versus adjustable rate loans

A fixed-rate loan features the same payment amount for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate mortgage will increase very little.

When you first take out a fixed-rate loan, the majority your payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. 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 for details.

There are many different types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, which means they can't go up over a specified amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in one period. In addition, almost all ARM programs have a "lifetime cap" — the interest rate won't exceed the capped amount.

ARMs most often have their lowest, most attractive rates at the beginning of the loan. They usually provide the lower interest rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of ARMs benefit borrowers who plan to move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the house longer than this initial low-rate period. ARMs are risky when property values decrease and borrowers are unable to sell their home or refinance.

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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