Fixed versus adjustable rate loans
With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but in general, payments on these types of loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, the majority the payment goes toward interest. The amount applied to principal goes up slowly each month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at this lower 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'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 how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. Some ARMs won't increase 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 your payment can go up in one period. Most ARMs also cap your rate over the life of the loan.
ARMs most often have their lowest rates toward the beginning. They usually provide that rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who expect to move within three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the 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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