Fixed versus adjustable loans

A fixed-rate loan features a fixed payment over the life of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for your fixed-rate loan will increase very little.

During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage toward principal. The amount paid toward your principal amount increases up slowly every month.

You can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more 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 the best rate currently available. Call Family Mortgage Company of Hawaii, Inc. NMLS #244497 at (808) 935-0678 to learn more.

There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. 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 a year, even if the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in one period. Plus, almost all ARMs have a "lifetime cap" — this cap means that your interest rate can't ever exceed the capped amount.

ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed 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 they adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (808) 935-0678. We answer questions about different types of loans every day.

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