Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment stays the same for the life of your loan. The amount of the payment allocated for principal (the actual loan amount) goes up, however, the amount you pay in interest will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on your fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller part toward principal. The amount paid toward your principal amount goes up gradually each month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Hancock Mortgage Partners, LLC NMLS# 229844 at 225 819 7670 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs won'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 that the monthly payment can go up in a given period. Additionally, almost all ARMs feature a "lifetime cap" — this cap means that your rate can't exceed the cap percentage.
ARMs most often have the lowest rates toward the beginning. They guarantee the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to stay in the house for any longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 225 819 7670. It's our job to answer these questions and many others, so we're happy to help!