Adjustable versus fixed rate loans

A fixed-rate loan features the same payment amount over the life of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up 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 toward interest. The amount applied to principal increases up slowly each month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can 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 how we can help.

There are many kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, which means they can't go up over a specific amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in one period. Additionally, the great majority of adjustable programs have a "lifetime cap" — this means that your interest rate won't go over the capped percentage.

ARMs usually start at a very low rate that may increase as the loan ages. 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. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values go down and borrowers are unable to sell or refinance their loan.

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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