When a homeowner is working on refinancing their home one of the most important factors is whether an adjustable rate mortgage (ARM) or a fixed mortgage is the best choice. Maybe neither of these is the right choice and the homeowner should ultimately choose a loan that combines both options. An ARM is a mortgage where the interest rate varies and tends to fluctuate depending on the financial market as a whole. These interest rates are usually tied to the prime index rate, when this rate fluctuates the mortgage rate fluctuates. A fixed mortgage is a mortgage where the interest rate remains the same as long as the terms of the agreement are met. The bottom line is you want the lowest refinance mortgage rates.
Many homeowners consider a fixed mortgage to be the most desirable option since the interest rate will not change, and this can largely be the an advantage but it is not always a good thing. For consumers who have very good credit and are able to get a favorable interest rate at any time then a fixed mortgage will be very advantageous. If the interest rate that is locked in if among the best interest rates available then it is worthwhile to refinance at this rate since things are likely to stay in the homeowners favor. Another advantage with a fixed mortgage is that there is no worry about monthly mortgage payments varying based on fluctuations in interest; the payment will stay the same.
The biggest disadvantage to a fixed mortgage is because of the fact that the interest rate does not change. If a homeowner refinances at a fixed rate and a better rate becomes available in the future then this is no longer saving anyone any money. This would mean that another refinance would be necessary in the future if the best rate still wants to be enjoyed, which would also mean additional closing costs and fees for a new refinance.
An ARM is a great option when the overall interest rate is expected to lower in the future. A skilled financial consultant will have some predictions on this but of course nothing is certain so it cannot be relied on too heavily. However, if overall interest rates are already high and its generally expected to lower over the course of the loan then an ARM will be very beneficial since the rate will also lower over time.
The main disadvantage to an ARM is that the interest rate has the capacity to change significantly and with no warning. This means that if the interest rate suddenly changes, the monthly payment will change as well to compensate. While this is concerning most of these mortgages have a safety clause in place to provide some protection. These clauses state that the interest rate cannot be raised or lower by more than a certain percentage within a period of time. This will protect homeowners from too much of a fluctuation, which lessens the disadvantage.
There are also hybrid mortgages that have aspects of both an ARM and a fixed mortgage if neither of those previous options was beneficial. Usually this means that a fixed rate is initially offered for a certain period of time and that an adjustable rate becomes effective after that. The reverse is also available, with the fixed rate coming in after time. This can be more risky since the rate at that time may not be favorable for a fixed rate.
