A Guide to Refinancing with ARMS and Fixed Rate Mortgages

A couple of commonly used home refinance options are fixed and adjustable rate mortgages. The option you choose should reflect two things; interest rates and any moving plans you may have.

Adjustable rate mortgages have interest rates that fluctuate with changes in the national interest rate. These have a couple of important stats you should know; the adjustment period and interest rate cap. How often ARMs adjust is determined by the adjustment period with the interest rate cap governing how much the interest is allowed to rise after each adjustment. Lower caps are better. These prevent large swings in rates that could devastate homebuyers should interest rates rapidly increase.

Conversely, a fixed rate mortgage has an interest rate that does not change. These can be repaid over a number of durations. Generally speaking, the shorter the loan period, the less interest you will pay, but at the cost of higher monthly payments. Shorter loans accrue less interest over their lifetimes. By choosing the shortest loan payment period that you can fit into your monthly budget, you can save hundreds of thousands of dollars over the lifetime of the your mortgage.

Because ARM interest rates can change in response to current economic trends, lenders charge less for these types of loans than loans with fixed interest. Unlike an ARM which is able to pass along any increases in national interest rates and increases to their cost of business to their borrowers, fixed rates must endure the increases without the ability to make changes in the rates it charges. To protect themselves from interest rate changes, fixed rate mortgages charge more interest than do ARMs.

The length of time you will occupy you home should be the chief determining factor when choosing the best way to refinance you home mortgage. Think you are going to stay where you are for a long time? Then a fixed rate will stop any future interest rate changes from affecting you. While maintaining the option to refinance should rates suddenly drop significantly lower, with a fixed rate you protect yourself from any increases that may occur down the line. Going to move soon? Then you may want to consider an ARM for their low interest. Also consider that US interest rates change slowly, meaning any increase, should an increase occur, between now and when you move will probably be minor.