Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of your mortgage. The portion allocated to principal (the loan amount) increases, however, your interest payment will decrease in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan go mostly toward interest. This proportion gradually reverses itself as the loan ages.

You can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when 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 stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call First Access Mortgage at (985) 429-1770 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, interest for ARMs are based on a federal index. A few of these 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 programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. In addition, almost all ARM programs feature a "lifetime cap" — the rate can't ever exceed the cap percentage.

ARMs usually start out at a very low rate that may increase over time. 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 kinds of loans are fixed for 3 or 5 years, then adjust. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the loan adjusts.

Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the home longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.

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!

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