If you have decided that you want to refinance your mortgage, you have probably been presented with a few different choices. One of the first decisions you might need to make is between an adjustable rate mortgage, usually called an ARM, and a fixed rate mortgage. The right answer really depends upon your situation.
Fixed Rate vs. Adjustable Rate Refinance Mortgages
This explains the basic differences between an ARM and a fixed rate mortgage:
- Adjustable rate: An ARM might be attractive because it has lower rates. However, it’s important to know that these rates are indexed to some market index, and they can get adjusted upwards.
- Fixed rate: As the name implies, fixed rate mortgages get a set interest rate until they are paid off. While the rate might seem higher in the beginning, they are certainly more predictable and easier to plan for.
A fixed rate mortgage might seem more expensive at first, but it might not work out to be more expensive in the long run. It’s really impossible to predict interest rates over the next few years or the next few decades. In fact, there were lots of stories about people who got in trouble because their mortgage payments increased quite a bit after their loan increased its rates. Suddenly, their mortgage payments grew so large that the homeowners couldn’t afford to make monthly payments.
If you are reluctant to refinance at a fixed rate because you believe interest rates will drop in a few years, you might be able to refinance again in a few years. You don’t always have to look at a mortgage as something you have to live with until the term ends.
Typically, an ARM will have a guarantee period that might last for periods between one to ten years. That means that the lender can’t increase the rate within that time period. If you are sure that you will sell the house, be able to refinance, or be in a good position to afford a higher mortgage, it might make sense to consider an ARM.
Should You Get a Fixed Rate or ARM Mortgage?
There is little doubt that an ARM can be risky. If interest rates suddenly increase, you might find that your mortgage payments also spike. However, you are likely to find a lower introductory rate for an ARM, so it might be something to consider if you don’t have plans to keep your home very long or are sure that you can always refinance.
It’s probably a good idea to speak with a mortgage broker to learn what types of refinancing offers that you might qualify for. A good broker can also help you understand the pros and cons of different choices for your unique situation.