Refinance Tips: Fixed or Adjustable Rate Mortgages


Although the interest rates have risen, home refinancings still account for more than one third of all mortgage applications. It seems that it would be more appealing to refinance when rates are going down but there are several reasons to refinance even if the rates are rising. If your home has an adjustable mortgage that you want to lock in at the current interest rate or if you need to get cash out of your home, you want to consider refinancing.

According, taking out a home equity loan may be the first choice of many borrowers needing cash because their interest rate may already be low and fixed. "Borrowers who might have considered a prime-rate home equity loan for a home improvement or other need are turning to cash-out refinance options now that the prime rate is above 8 percent," said Frank Nothaft, Freddie Mac's chief economist in a statement released with the quarterly report on refinancing in November.

If refinancing is the best way to meet your needs, you will have to decide whether you want a fixed or adjustable rate mortgage. Obviously, if you are worried about interest rates, a fixed mortgage is more likely to give you peace of mind. With any adjustable mortgage, you run the risk of interest rates rising and your payments rising along with them. However, you should note that historically interest rates for home mortgages have usually leveled out between the 7-percent and 9-percent range. So if you feel confident and have the financial means to weather rising rates, an adjustable rate mortgage may be the best product for you.

Consider hybrid ARMs which have longer fixed periods which can be three, five, seven or even ten years. If your monthly income fluctuates, you may want to consider an option ARM with an interest only option. If you choose one that has a negative amortization option however, make sure you completely understand how your loan works. The payment options are based on the LIBOR index, COFI index, COSI index, and MTA index which changes the amount of your payment possibilities. You should completely comprehend how these payments affect your equity and your loan amount.

The bottom line is that fixed rates will give you security while adjustable rates may save you money in the right situation. Examine your options carefully with a reputable mortgage broker.

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