Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on your fixed-rate loan will be very stable.

Early in a fixed-rate loan, most of your payment pays interest, and a much smaller part toward principal. This proportion gradually reverses itself as the loan ages.

You might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call First Access Mortgage at (985) 429-1770 to discuss how we can help.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates 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.

The majority of Adjustable Rate Mortgages feature this cap, which means they can't go up above a specific amount in a given period of time. 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 a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment won't go above a certain amount in a given year. Most ARMs also cap your rate over the life of the loan period.

ARMs most often feature the lowest rates at the beginning of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate loans benefit people who will move before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (985) 429-1770. We answer questions about different types of loans every day.

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