One of the most essential decisions a homeowner will have to make when deciding to re-finance their home is whether they would like to refinance with a fixed mortgage, an adjustable rate mortgage (ARM) or a hybrid loan which combines the two options. The names are pretty much self descriptive but essentially a fixed rate mortgage is a mortgage where the interest rate remains steady and an ARM is a mortgage where the interest rate varies. The amount the interest rate varies is usually tied to an index such as the prime index. In addition there are usually clauses which prevent the interest rate from rising or dropping dramatically during a specific period of time. This security clause provides protection for both the homeowner and the lender.

Advantages of a Fixed Option

A fixed re-financing alternative is perfect for homeowners with good credit who are able to lock in a favorable interest rate. For these homeowners the interest rate they are able to retain makes it worthwhile for the homeowner to re-finance at the new interest rate. The main advantage to this sort of re-financing options is steadiness. Homeowners who re-finance with a fixed mortgage rate do not have to be concerned about how their payments may change during the course of the loan period.

Disadvantages of a Fixed Option

Although the ability to lock in a favorable interest rate is an advantage it can also be considered a disadvantage. This is for the reason that homeowners who re-finance to obtain a favorable interest rate will not be able to take advantage of subsequent interest rate drops unless they re-finance again in the future. This will cause the homeowner incurring extra closing costs 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 take into account re-financing with an ARM if they expect the rates to drop during the course of the loan period. But, interest rates are tied to a number of various factors and may rise unpredictably at any time in spite of the predictions by industry experts.

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

Disadvantages of an ARM Option

The most obvious disadvantage to an ARM re-financing alternative is that the interest rate may rise a lot and unpredictably. In these situations the homeowner may suddenly find themselves paying considerably more each month to compensate for the higher interest rates. While this is a disadvantage, there are some elements of protection for both the homeowner and the lender. This frequently comes in the form of a clause in the terms of the contract which prevents the interest rate from being raised or lowered by a definite percentage over a definite period of time.

Consider a Hybrid Re-Financing Option

Homeowners who are in doubt and find certain aspects of fixed rate mortgages as well as certain aspects of ARMs to be appealing might consider a hybrid re-financing option. A hybrid loans is one which combines both fixed interest rates and adjustable interest rates. This is frequently done by offering a fixed interest rate for an introductory period and then converting the mortgage to an ARM. In this option, lenders usually offer introductory interest rates which are very enticing to encourage homeowners to opt this option. A hybrid loan may besides 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 can be quite risky as the homeowner may find the interest rates at the conclusion of the introductory period are not favorable to the homeowner.

Want to know a proved method to make money? Then forex trading is just for you!!!

Learn to earn! Discover forex trading!

Need money? Discover a reliable and profitable source of income – forex investment!

Technorati Tags: credit card debt, financial news, debt prevention

• No Related Post

If you like this post then please subscribe to my full RSS feed.
You can also subscribe to Finance Portal by email.

Rate this post:

(No Ratings Yet)

 Loading ...