Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The portion that goes to principal (the amount you borrowed) will increase, but 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. But generally payment amounts for your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount applied to principal increases up slowly each month.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Hancock Mortgage Partners, LLC NMLS# 229844 at 225 819 7670 for details.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment will not go above a fixed amount in a given year. Most ARMs also cap your interest rate over the life of the loan.
ARMs most often have the lowest, most attractive rates at the start 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 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. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the home longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 225 819 7670. We answer questions about different types of loans every day.