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Adjustable Rate Mortgages vs. Fixed Rate Mortgages

Sep 21, 2007
In today's financial market, more and more people are asking themselves if now is the time to refinance their ARM into a Fixed Rate Mortgage.

Some things to consider before you make the decision to refinance from your ARM to a Fixed Rate loan:

1) Why do you want a fixed rate loan? (A pretty basic question but you'd be surprised at the answers you might hear!)

Remember, your situation is unique. Don't be tricked into thinking that one particular type of loan is a must have just because your friend or coworker just got "a great rate" on their latest refinance or because it was the loan your parents had.

2) Does your current loan have a prepayment penalty?

Many of today's loans come with prepayment penalties. Typically, a prepayment penalty is charged if the borrower repays the loan within the first 2-3 years. This payment is usually equal to six months interest. If you are just a few months out from the expiration of your penalty period, you may want to wait it out before refinancing. However, even with a penalty the long term savings of locking in a lower fixed rate today could more than cover the penalty.

3) Is your current ARM still in its fixed period? How often does it / will it adjust and what are the adjustment caps?

Depending on the initial terms of your ARM, it's useful life expectancy may not have expired yet. If you are in loan that has a rate in the 3-4% range and that still has some time before it adjusts, you may want to hold on to it for a bit longer. However, if your loan is about to adjust for the first time, or of it has been adjusting, this might be the right moment to move out of that loan.

4) How long do you plan on living in your home?

If you only plan on living in your home for a few more years, it might not be worth it to move from a program like a low rate ARM or an Interest Only Program to a traditional Fixed Rate loan. There may be better things to put your money towards each month that putting a few extra dollars towards the principal of your home.

5) Do you think you may want to refinance your home in the next 5-10 years?

If you are planning to use the equity in your home to pay for future like remodeling, college tuition, etc., you way want to think twice about locking in a rate for the next 30 years. There is no reason to pay more than you have to today toguarantee a rate 15 years from now that you won't be able to benefit from. If you are still on the fence, there are loan programs that give you the best of both worlds. An example of such a program is 30 year fixed rate loan with a 10 year interest only option. This program gives you the security and comfort of knowing that your interest rate will not change over the next 30 years with the flexibility to make the lower interest only payment during the first ten years of the loan. Additionally, there are ARMs that are fixed for the first 3, 5, 7, and even 10 years. Regardless of your situation, there is a loan out there that can meet your needs and your individual financial situation.

If you are reading this you are definitely doing the right thing by taking some time to educate yourself about the loan process and the types of loan programs on the market today.

If you feel that refinancing might benefit you, or if you have more questions, your next step should be to speak with an experienced mortgage professional.

Beware companies or individuals that make you put money down or order an appraisal before they agree to discuss your situation with you. Also, be wary of those who won't talk to you until they pull your credit report. While a credit report and an appraisal will be necessary if you decide to go forward, you have the right to talk to someone about your options before they check your credit or order an appraisal. These are frequently just sales tactics to make you feel like you are obligated to go forward with that particular broker or lender.
About the Author
Joe Ramirez is a mortgage professional and featured contributor at California Refinance and MyRefi.com.
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