Do You Know Which Refinance Option Is Best For You?

This is one question that is asked by just about everyone. “Should I get a fixed or adjustable rate mortgage when I refinance?

Since your home is about the most significant and important purchase you will make, that is a reasonable question to ask.

What you will see at first glance is that fixed-rate mortgages may seem like the best all around choice for most homeowners. Without fail you know what your payment is for the next 15, 20 or 30 years depending on the term of your loan.

But wait, is it the best choice for you?

Refinancing would mean that a fixed-rate loan may eliminate the risk of a rate increase down the road but still, that benefit can make a significant difference in your interest rate and payment amount. Unlike those who refinance with an ARM, homeowners who refinance with long term fixed rates pay between 1.00-2.00% higher.

If homeowners refinance to an adjustable rate mortgage, then they may save thousands of dollars in interest and refinancing fees. To purchase a home, it’s often times a buyers only option.

The basics of an ARM (adjustable rate mortgage) are the same. You have a start rate which is lower than a fixed rate. Your rate/payment will adjust up or down depending on the market and the specifics of your ARM plan at specified intervals. A cap on how much your rate/payment can be raised at specified intervals and over the life of the loan is what the majority of ARM plans have.

Try to look closely at the details of your ARM plan.

After you refinance, what if your loan amount would be $100,000, your starting interest rate is 1.25%, the term on your loan is 30 years and your starting payment is $333.25 per month?

Your payment is fixed at that rate for 12 months and the worst case is that your payment may increase 7.5% of your payment amount is another thing we can assume. You will find that the maximum amount your new payment will be starting on the 13th month would be $358.24 after you do a quick little math. What that means is an increase of only $24.99 per month. Does that payment increase present a problem for you?

This scenario may seem like an over simplification of how an ARM loan works but still, my point here is to figure out what the worst case scenario is for EACH of the maximum changes possible and ask yourself if the result is doable. Do you think you can handle the maximum increase possible?

By doing this homework you’ll destroy the “unknown” beast that petrifies most homeowners who refinance or purchase a home.

Most ARM plans allow you to refinance and switch over to a fixed rate during some part of the loan period. In case the interest rates drop to an all time low, what you can always do is covert to a fixed rate loan for long term security.

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