Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but in general, payment amounts on these types of loans vary little.
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.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Hancock Mortgage Partners, LLC NMLS# 229844 at 225 819 7670 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, interest rates 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 ARM programs feature a cap that protects you from sudden increases in monthly payments. 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 underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment can't go above a fixed amount in a given year. Most ARMs also cap your rate over the duration of the loan.
ARMs most often have the lowest rates at the beginning. They guarantee that rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.
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!