When choosing to re-finance a home, one of the most critical choices a homeowner would have to make is whether they want to refinance with a fixed mortgage, an adjustable rate mortgage (ARM), or a hybrid loan that blends the two options. The names are self-explanatory, but a fixed option rate mortgage has a fixed interest rate. While an adjustable rate mortgage has a variable interest rate. The prime index, for example, is used to determine how often the interest rate changes. There are normally provisions in place that prohibit the interest rate from rapidly rising or falling for a set period of time. This security clause is included in the contract.
The Benefits Of A Fixed Option
For homeowners with good credit who want to lock in a low-interest rate, a fixed re-financing option is perfect. For these homeowners, the interest rate they will keep makes it worthwhile to refinance at the new rate. The main benefit of this form of re-financing alternative is its consistency. Homeowners who refinance with a fixed interest rate don’t have to worry about their payments fluctuating over the term of the loan.
Drawbacks Of A Fixed Option
While being able to lock in a low interest rate is a benefit, it can also be viewed as a drawback. This is because homeowners who re-finance to get a better interest rate won’t be able to. Take advantage of potential interest rate declines until they re-finance again. When the homeowner re-finances. They would have to pay extra closing costs as a result of this.
The Benefits Of An Arm Choice
In circumstances where the interest rate is likely to drop in the near future, an ARM re-finance option is advantageous. If you’re good at forecasting economic and interest rate patterns. You may want to consider refinancing with an ARM if you think rates would drop over the loan term. Interest rates, on the other hand, are influenced. By a variety of factors and can rise at any time, despite industry analysts’ forecasts.
A homeowner who will foresee the future can decide whether or not an ARM is the best re-financing choice. However, since this isn’t feasible, homeowners must either trust their intuition. And hope for the best, or choose a less risky alternative like a fixed interest rate.
The Drawbacks Of Choosing An Arm Option
The most obvious drawback of an ARM re-financing option is the risk of a substantial and unforeseen increase in the interest rate. To compensate for the higher interest rates. The homeowner will find themselves paying considerably more per month in these cases. Although this is a downside, both the homeowner and the lender are covered in some ways. This is usually in the form of a contract clause that forbids the interest rate from being increased or reduced by a certain amount for a certain period of time.
Take Into Account A Hybrid Re-financing Option.
Homeowners who are undecided and find elements of both fixed rate and adjustable rate mortgages appealing should consider a hybrid re-financing choice. The term “hybrid loan” refers to a loan that has both fixed and adjustable interest rates. This is often accomplished by providing a fixed interest rate for a limited time and then transferring the loan to an ARM. In this case, lenders usually offer exceptionally low introductory interest rates to entice homeowners to choose this choice. A hybrid loan may also operate in the opposite direction, selling an ARM for a set period of time before switching to a fixed rate mortgage.