Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage toward principal. This proportion gradually reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Acceptance Capital Mortgage Corporation at (337) 453-0012 to discuss your situation with one of our professionals.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment will not go above a certain amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs usually start out 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 introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the home for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (337) 453-0012. It's our job to answer these questions and many others, so we're happy to help!