Search:

Fixed Rate Mortgage Refinance or Adjustable Rate Mortgage Option

When a homeowner decides to refinance their home, an important decision to be made will be whether to go for a fixed rate mortgage refinance, an adjustable rate mortgage (ARM) option or a hybrid loan which is a combination of the two.

A fixed rate mortgage is one where the interest rate remains the same. The ARM is one where the interest rate varies. The interest rate variation is normally tied to an index like the prime index. In addition, usually there are clauses which will prevent the interest rate to go up or down dramatically during a specific period of time, thus providing protection for both the lender and the homeowner.

Fixed Option Advantages

For homeowners who have good credit and are able to lock in a favorable interest rate, the fixed rate mortgage refinance option is ideal. Stability is the major advantage for this refinancing option. Once the homeowners do a fixed rate mortgage refinance, they do not have to worry about their payments varying during the course of the loan period.

Fixed Option Disadvantages

One problem with the fixed option is if the interest rate drops subsequently, the homeowners will not be able to take advantage of it unless they refinance again in the future. This, however, will incur additional closing costs when they refinance again.

ARM Option Advantages

An ARM refinance option is favorable if the interest rate is expected to drop in the near future. Homeowners who know how to predict the economic trends and interest rates may want to consider the ARM option if they anticipate rates to drop during the loan period. However, interest rates could rise unexpectedly at any time despite predictions by industry experts, as they are tied to many different factors.

Unless homeowners can predict the future, they are basically relying on their instincts and hoping for the best, or select the less risky option like the fixed interest rate.

ARM Option Disadvantages

Since the ARM option interest rate may rise suddenly and significantly. The homeowners will need to pay more each month due to the increase in the interest rate. There is some protection that is provided to the homeowner which prevents the interest rate being increased by a certain percentage over a specific period of time. Note also that the clause will prevent interest rate from being decreased below a certain percentage.

The Hybrid Refinancing Option

People who are not able to decide which option to take or like some aspects of both have a choice of a hybrid refinancing option. This is typically done by introducing a fixed interest rate for the introductory period and later converting it to ARM. Lenders are known to provide this offer with introductory interest rates to entice the homeowners to go for this option.

The hybrid loan could also start with an ARM and then be converted to fixed rate mortgage. This can be quite risky as the interest rates at the end of the introductory period may not be favorable to the homeowner.

Additional Articles From - Home | Finance

What is Finance - Part 1 - By : Micky
What Are My Credit Card Alternatives With Bad Credit? - By : unsecuredloan
Hedge funds are popping up everywhere - By : lalit sharma
Overview of Online Forex Trade - By :
You can make social security obsolete - By :
Save Money On Your Electric Bill - 4 Easy Steps - By : Steven Saliba
Forex Brotherhood is the new community traders are raving about - By : T.J.Howell
Selling Your Investment Land in a Slow Market - By :
Making Big Money with Forex Trading - By : bozenaj
WHAT DO YOU NEED TO START A BUSINESS - By : mark simmons

	Print This Article
	Post Comment
	Add To Favorites
	Email to Friends
	Ezine Ready

Is it possible to make
10K in a weekend?

Sitemap | Articles | Resources | Additional Recommended Links