Fixed versus adjustable rate loans

A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for a 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 part toward principal. This proportion gradually reverses as the loan ages.

You can 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 want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call Family Mortgage Company of Hawaii, Inc. NMLS #244497 at (808) 935-0678 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest on ARMs are based on an outside 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.

The majority of Adjustable Rate Mortgages are capped, so they won't go up over a specified amount in a given period of time. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment won't go above a fixed amount in a given year. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs most often have the lowest rates toward the start of the loan. They guarantee the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on remaining in the home longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (808) 935-0678. We answer questions about different types of loans every day.