Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The portion that goes to principal (the actual loan amount) will go up, but your interest payment will go down in the same amount. The property tax and homeowners insurance will go up over time, but in general, payments on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Family Mortgage Company of Hawaii, Inc. NMLS #244497 at (808) 935-0678 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, which means they can't increase over a specified amount in a given period. 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 ensures your payment won't increase beyond a certain amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan period.

ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to remain in the home longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (808) 935-0678. It's our job to answer these questions and many others, so we're happy to help!

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