Selecting Mortgage Options: Fixed or ARM

When a homeowner decides to re-finance their home, one of the most important decisions they will have to make is whether they would like to refinance with a fixed mortgage, an adjustable rate mortgage (ARM) or a hybrid loan which merges the two options. The names are actually quite self explanatory but more basically, a fixed rate mortgage is a mortgage where the interest rate remains constant and an ARM is a mortgage where the interest rate is subject to change. The percentage the interest rate is able to vary is usually tied to an index like the prime index. Moreover, there are usually clauses which thwart the interest rate from increasing or dropping dramatically during a definite period of time. This safety clause is meant to provide protection for both the lender and the homeowner.

Fixed Option Advantages

A fixed re-financing option is the best choice for homeowners with good credit who are able to lock in an interest rate which is favourable to them. For these homeowners, the interest rate they are able to maintain makes it meaningful for them to re-finance at the new interest rate. The main advantage to this re-financing option is that it is really very stable. Homeowners who decide to re-finance with a fixed mortgage rate won’t have to bother about how their payments might vary during the loan phase.

Fixed Option Disadvantages

Even though the possibility to lock in a favourable interest rate is a significant advantage it can also be seen as a disadvantage. This is because some homeowners who re-finance in order to get an advantageous interest rate will not be able to make the most of successive interest rate decline unless they re-finance again later on. This means that the homeowner will have to bring upon himself additional closing costs to be able to re-finance again differently.

ARM Option Advantages

ARM re-financing options can be favourable in situations where the interest rate is expected to go down in the near future. Homeowners who are talented at forecasting trends in the economy and interest rates might choose to re-finance with an ARM, especially if they expect the rates to drop during the loan period phase. Nevertheless, interest rates are related to a number of different issues and may increase without prior warning despite the best predictions by professional experts.

So a homeowner who is able to forecast trends would be able to determine whether or not an ARM is the best re-financing option for them. Nevertheless, since this is not always possible, homeowners will have to either rely on their instincts and hope for the best or choose an option which is less chancy.

ARM Option Disadvantages

The most significant disadvantage to re-financing with ARM is that the interest rate might rise significantly at any time. In these situations the homeowner might be faced with higher costs each month. Though this is a real disadvantage, there are a few protection basics for both the homeowner and the lender. This usually comes in the form of a clause in the terms of the contract which will prevent the interest rate from being raised or lowered to a certain percentage over a given period of time.

Thinking Of A Hybrid Re-Financing Option

Homeowners who are unresolved and find appealing elements in both types of mortgage might be better off to think about a hybrid re-financing option. Hybrid loans combine both fixed interest rates and adjustable interest rates. This is often done by offering an initial fixed interest rate and then changing the mortgage to an ARM. With this option, lenders will typically offer an initial interest rate which is extremely enticing in order to encourage homeowners to choose this option. A hybrid loan may also work conversely, by offering an initial ARM and then converting the mortgage to a fixed rate mortgage. This version can also be quite risky as the homeowner might find the interest rates at the conclusion of the initial period are not advantageous to him.

Article Source: http://www.debtfinancearticles.com.

About the Author:
Gemma Markby is a contributing real estate editor at http://www.debtfinancearticles.com/. This article may be reproduced provided that its complete content, links and author byline are kept intact and unchanged. No additional links permitted. Hyperlinks and/or URLs must remain both human clickable and search engine spiderable.