Choosing a Fixed or ARM Option

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Choosing a Fixed or ARM Option

A fixed rate mortgage has the same payment for the entire term of the loan. The Option ARM uses a low initial rate to calculate your initial minimum monthly payment. Although the interest rate will increase after 1 to 3 months, your low payment will remain fixed for the entire year. This can produce a much lower monthly payment than a traditional fixed rate mortgage, or even an adjustable rate mortgage (ARM).

One of the most crucial decisions a householder will have to make when deciding to re-finance their house is whether they would like to refinance with a fixed mortgage, an adjustable rate mortgage (ARM) or a hybrid loan which combines the two alternatives. The names are pretty much obvious but basically a fixed rate mortgage is a mortgage where the rate of interest remains constant and an ARM is a mortgage where the rate of interest varies. The amount the rate of interest varies is normally tied to an index such as the prime index. Additionally there are generally clauses which prevent the rate of interest from going up or dropping dramatically during a particular time period. This safety clause provides protection for both the householder and the loaner.

Advantages of a Fixed Option

A fixed re-financing alternative is ideal for householders with good credit who are able to lock in a favorable rate of interest. For these householders the rate of interest they’re able to retain makes it worthwhile for the householder to re-finance at the new rate of interest. The major advantage to this type of re-financing alternatives is stability. Householders who re-finance with a fixed mortgage rate don’t have to be concerned about how their payments may vary during the course of the loan period.

Disadvantages of a Fixed Option

Though the power to lock in a favorable rate of interest is an advantage it may also be considered a disadvantage. This is as householders who re-finance to get a favorable rate of interest won’t be able to take advantage of subsequent rate of interest drops unless they re-finance again in the future. This will result in the householder incurring additional closing prices when they re-finance again.

Advantages of an ARM Option

An ARM re-finance option is favorable in situations where the interest rate is expected to drop in the near future. Homeowners who are skilled at predicting trends in the economy and interest rates may consider re-financing with an ARM if they expect the rates to drop during the course of the loan period. However, interest rates are tied to a number of different factors and may rise unexpectedly at any time despite the predictions by industry experts.

A homeowner who can predict the future would be able to determine whether or not an ARM is the best re-financing option. However, since this is not possible homeowners have to either rely on their instincts and hope for the best or select a less risky option such as a fixed interest rate.

Disadvantages of an ARM Option

The most obvious disadvantage to an ARM re-financing alternative is that the rate of interest may go up significantly and unexpectedly. In these situations the householder may suddenly get themselves paying significantly more each month to compensate for the higher rates of interest. While this is a disadvantage, there are some elements of protection for both the householder and the loaner. This frequently comes in the form of a clause in the terms of the contract which prevents the rate of interest from being raised or lowered by a certain percentage over a particular time period.

Consider a Hybrid Re-Financing alternative

Householders who are undecided and get certain aspects of fixed rate mortgages as well as certain aspects of ARMs to be appealing might consider a hybrid re-financing alternative. A hybrid loans is one which combines both fixed rates of interest and adjustable rates of interest. This is often done by proposing a fixed rate of interest for an introductory period and then converting the mortgage to an ARM. In this alternative, loaners normally offer introductory rates of interest which are extremely enticing to encourage householders to choose this alternative. A hybrid loan may also work in the opposite way by offering an ARM for a certain amount of time and then converting the mortgage to a fixed rate mortgage. This version may be quite risky as the householder may find the rates of interest at the conclusion of the introductory period are not favorable to the householder.

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finance, financing, loan, loans, mortgage, mortgage rate, mortgages, refinance, Safety, Trends

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May 23 2011 08:07 am | Interior Design and Organizing - Storage Solution and Safety

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