Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part goes to principal. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Coastal Mortgage Corp. at 504-866-5626 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a "cap" that protects borrowers 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 a couple percent per year, even though 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 rate directly, caps the amount that the payment can increase in one period. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have their lowest rates at the start. They provide that rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory 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 adjust after the initial period. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on remaining in the home longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 504-866-5626. We answer questions about different types of loans every day.