Differences between adjustable and fixed loans
With a fixed-rate loan, your payment stays the same for the entire duration of your loan. The amount of the payment allocated to your principal (the loan amount) will go up, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans don't increase much.
At the beginning of a a fixed-rate loan, most of your payment is applied to interest. The amount applied to your principal amount goes up slowly each month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an 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 discuss your situation with one of our professionals.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment won't increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs usually start at a very low rate that usually increases over time. You've probably heard of 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 after the initial period. These loans are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they can't 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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