Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment stays the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller part toward principal. As you pay , more of your payment goes toward principal.

You might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. 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 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest for 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 feature this cap, so they can't increase above a specified amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment won't go above a fixed amount in a given year. The majority of ARMs also cap your rate over the life of the loan period.

ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to stay in the home for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get 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!