The Ins and Outs of Adjustable Rate Mortgages

Couple in their new home holding their keys

In today’s high interest rate environment, mortgage payments for new home purchases and refinances are substantially higher than even a few years ago. One way that potential homeowners may be able to combat these higher rates is by considering an Adjustable Rate Mortgage (ARM). With an ARM, your initial interest rate and payments are typically lower than a fixed-rate mortgage, and in exchange the homebuyer accepts the possibility that rates may increase in the future. An ARM may also make it easier for some homebuyers to qualify for a larger loan amount and a bigger purchase price because of the lower qualifying interest rate and payment.

ARMs may not be the best option for every homebuyer, but as long as you understand the additional risks in exchange for a lower interest rate and payments at the beginning of the loan, they may be a good option for you.

Hawaii State FCU’s Hybrid ARM Program
Hawaii State FCU offers a “hybrid” ARM program, in which there is a fixed rate and payment during an initial introductory period, with adjustments to the interest rate and payment thereafter. This is beneficial to many homebuyers because it ensures that during this initial period, your interest rate and payment amount will not change. Other lenders’ ARM programs may not offer an initial fixed-rate period, which means your rate and payment amount could change as early as 6 to 12 months after the loan funds.

In addition, Hawaii State FCU only offers “fully amortized” ARMs, meaning the principal and interest payments are adjusted along with the rate adjustment to ensure that your loan balance is fully paid off at the end of the loan term with no lump-sum “balloon” payment due at the end. When comparing offers, it is recommended that you confirm whether or not the loan program you are looking at is fully amortized, otherwise you may be required to make a balloon payment in the end.

We offer 5/6, 7/6 and 10/6 Hybrid ARMs, meaning that your initial introductory interest rate will last either 5, 7 or 10 years, depending on the type of ARM you choose, and after the introductory period, your interest rate and payment will be subject to change every six months thereafter for the remaining years until the end of the loan term.

Will I Save Money With an ARM?
For Hybrid ARMs with an initial introductory fixed-rate period, like the ones offered by Hawaii State FCU, the amount of savings during that introdutory period compared to a fixed rate mortgage can be calculated to a precise amount. However, if you plan to keep your mortgage beyond the initial introductory fixed-rate period, the amount of savings can vary widely, and an ARM can actually cost more in the long run than a traditional fixed-rate mortgage if market rates remain high in the future.

With a Hybrid ARM, you may also experience a substantial increase to both the interest rate and payment applicable to your loan at the end of the initial introductory fixed-rate period. This may create financial difficulties if you are not able to afford the increased payments. It’s always good to consider factors such as these when researching the type of financing that is right for you.

When Should I Consider an ARM?

  • If you’re looking for more purchasing power, it may be easier to qualify for a larger loan if applying for a Hybrid ARM compared to a fixed-rate mortgage, because of the lower required minimum principal and interest payment used to qualify borrowers.
  • If you do not plan to retain your residence for the long-term (more than 10 years), you might see substantial savings with an ARM.

Where Can I Go to Learn More About ARMs?
To learn more about Adjustable Rate Mortgages, with a shopping comparison guide and explanation of the lender required Loan Estimate disclosure, visit the Consumer Financial Protection Bureau’s Consumer Handbook on Adjustable Rate Mortgages.

Interested in an ARM? View our Adjustable Rate Mortgage program details and disclosures. Click here.


Victor Brock SVP Consumer and Mortgage Lending

About Victor Brock

Victor Brock is senior vice president of the consumer and mortgage lending division at Hawaii State FCU. He manages the process, pricing, product offerings and servicing of all consumer and mortgage loans to the credit union’s members. Victor has been working in the banking industry since 1985, and has over 30 years of experience in consumer and mortgage lending. He received his Master of Business Administration from San Diego State University and his bachelor’s degree in business from the University of Minnesota, Minneapolis.

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