Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment stays the same for the life of your mortgage. The amount of the payment allocated for principal (the actual loan amount) will go up, but the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans vary little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller part toward principal. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Coastal Mortgage Corp. at 504-866-5626 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can go up in one period. In addition, the great majority of ARM programs have a "lifetime cap" — your interest rate can't go over the cap amount.
ARMs most often have the lowest rates toward the start of the loan. They provide the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are best for people who expect to move in three or five years. These types of ARMs are best for borrowers who will move before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to remain in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell their home 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.