Fixed versus adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward your principal amount goes up gradually each month.
You can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call First Access Mortgage at (985) 429-1770 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in one period. Almost all ARMs also cap your rate over the life of the loan.
ARMs usually start at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed 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 people who expect to move in three or five years. These types of ARMs benefit people who will sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky if property values decrease and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at (985) 429-1770. It's our job to answer these questions and many others, so we're happy to help!