Fixed versus adjustable loans

With a fixed-rate loan, your payment remains the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount applied to principal goes up slowly each month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Southwest Funding at (504) 832-3131 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.

Most programs feature a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can go up 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 that your payment will not increase beyond a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan.

ARMs usually start at a very low rate that usually increases as the loan ages. You've likely read about 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 expect to move in three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.

Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell their home or refinance at the lower property value.