Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on your fixed-rate loan will be very stable.
When you first take out a fixed-rate loan, most of the payment goes toward interest. This proportion gradually reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Acceptance Capital Mortgage Corporation at (337) 453-0012 for details.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest 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 Adjustable Rate Mortgages feature this cap, so they can't go up above a certain amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment won't increase beyond a certain amount in a given year. Plus, the great majority of ARM programs have a "lifetime cap" — the interest rate can't ever go over the cap percentage.
ARMs most often feature the lowest, most attractive rates toward the start. They usually guarantee the lower rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot 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!