Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment stays the same for the life of the loan. The portion that goes to principal (the amount you borrowed) will go up, but the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when 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 greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love 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.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates on ARMs are determined by a federal index. Some examples of outside indexes 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.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment won't go above a certain amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower 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 increasing rates when they cannot sell 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.