Choosing between a fixed and an ARM option
When planning to re-finance a property, one of the most critical considerations a homeowner will have to make is whether they want to refinance with a fixed mortgage, an adjustable-rate mortgage (ARM), or a hybrid loan that combines the two options. The names are self-explanatory, but a fixed-rate mortgage has a fixed interest rate, and an adjustable-rate mortgage has a variable interest rate. The prime index, for example, is used to determine how much the interest rate varies. There are frequently stipulations in place that limit the interest rate from substantially climbing or falling over a set period of time. Both the homeowner and the lender are protected by this safety provision.
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 appropriate. For many homeowners, the interest rate they can keep makes it profitable to refinance at the new rate. The main benefit of this type of re-financing option is its consistency. Homeowners who refinance with a fixed mortgage rate don’t have to worry about their payments fluctuating over the term of the loan.
Advantages and Disadvantages of a Fixed Option
Although 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 benefit of future interest rate cuts until they re-finance again. When the homeowner re-finances, they will have to pay more closing fees as a result of this.
The Benefits of an ARM Option
In circumstances where the interest rate is likely to reduce in the near future, an ARM re-finance option is advantageous. If you’re good at predicting economic and interest rate trends, you might want to consider refinancing with an ARM if you think rates will reduce during the loan term. Interest rates, on the other hand, are influenced by a variety of factors and may rise at any time, notwithstanding industry experts’ projections.
A homeowner who can foresee the future can decide whether or not an ARM is the best re-financing alternative. However, because this isn’t possible, homeowners must either trust their intuition and hope for the best or choose a less hazardous choice like a fixed interest rate.
The Drawbacks of Choosing an ARM Option
The most obvious disadvantage of an ARM re-financing option is the risk of a big and unexpected increase in the interest rate. To compensate for the higher interest rates, the homeowner may find themselves paying much more each month in these instances. While this is negative, both the homeowner and the lender are protected in several ways. This is usually in the form of a contract clause that restricts the interest rate from being raised or lowered by a certain percentage over a set period of time.
Take into account a hybrid re-financing option.
Homeowners who are uncertain and find features of both fixed-rate and adjustable-rate mortgages appealing can investigate a hybrid re-financing option. The term “hybrid loan” refers to a loan that has both fixed and adjustable interest rates. This is frequently accomplished by offering a fixed interest rate for a limited time and then switching the loan to an ARM. In this case, lenders often offer extremely low beginning interest rates to entice homeowners to choose this choice. A hybrid loan can also function in the reverse direction, offering an ARM for a set period of time before switching to a fixed-rate mortgage. This version is dangerous since the homeowner may discover that the interest rates at the end of the introduction term are not beneficial.