Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of your mortgage. The amount of the payment allocated for principal (the loan amount) goes up, but your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for your fixed-rate mortgage will be very stable.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller percentage goes to principal. This proportion reverses itself as the loan ages.

You can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in at the low 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 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 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates for ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a cap that protects borrowers from sudden increases in monthly payments. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can go up in a given period. The majority of ARMs also cap your interest rate over the life of the loan.

ARMs most often feature their lowest, most attractive rates at the start. They guarantee that rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs are best for borrowers who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a lower introductory 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 cannot sell 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!

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