Differences between fixed and adjustable loans

A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. The amount applied to your principal amount goes up gradually every month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more 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 the best rate currently available. Call Family Mortgage Company of Hawaii, Inc. NMLS #244497 at (808) 935-0678 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can increase in a given period. In addition, the great majority of ARM programs feature a "lifetime cap" — this cap means that the rate can't go over the capped amount.

ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They usually provide that rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For 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. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell their home or refinance with a 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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