Differences between fixed and adjustable loans
With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts for your fixed-rate loan will increase very little.
When you first take out a fixed-rate loan, most of your payment is applied to interest. The amount paid toward 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 these types of loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love 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 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment won't increase beyond a fixed 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 usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory 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. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate programs are best for people who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers are unable to sell their home or refinance.
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!