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 will increase over time, but in general, payments on fixed rate loans vary little.
When you first take out a fixed-rate loan, the majority your payment goes toward interest. That reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. People choose 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 more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Coastal Mortgage Corp. at 504-866-5626 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment can't go above a fixed amount in a given year. Plus, almost all ARMs feature a "lifetime cap" — your interest rate can't ever exceed the cap percentage.
ARMs most often feature the lowest rates at the start of the loan. They guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are often best for borrowers who expect to move in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to stay in the home longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell or refinance at the lower property value.
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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