Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans change little over the life of the loan.
At the beginning of a a fixed-rate loan, the majority your payment is applied to interest. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can 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 every six months, based on various indexes.
Most ARMs are capped, which means they can't go up above a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in a given period. Plus, the great majority of adjustable programs feature a "lifetime cap" — your interest rate can't ever go over the capped percentage.
ARMs usually start at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the house for any longer than this initial low-rate period. ARMs are risky when property values go down and borrowers cannot sell or refinance their loan.
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!