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Opt of Fixed rate or Adjustable Rate Mortgage:
This is one of the key factors to be considered by a homeowner when deciding to re-finance their home either by fixed rate mortgage (FIR) refinancing, by an adjustable rate mortgage (ARM) refinance or by hybrid loan. Hybrid loan is nothing but a combination of fixed and ARM option. The names of these options are self-explanatory, however fixed mortgage means that mortgage interest rate always remains constant and ARM means that mortgage interest rate is always variable. The varying interest amount is tied with an index like the prime index rate. Moreover it has general type of clauses that prevent the drastic amount of changes in the interest rate like raising or dropping during a definite span of time. These clauses are called as safety clauses that provide security for the individuals like homeowners and lenders.
Fixed Rate Mortgage Advantages:
This option of re-financing is perfect for homeowners with good credit and are able to acquire by a favorable rate of interest. For such homeowners, the rate of interest should make it worthwhile at the new rate of interest to re-finance. The salient feature of this mortgage is stability of re-finance. Homeowners who are re-financing with a fixed rate mortgage, need not be concerned on their payments varying during the loan period course.
Fixed Rate Mortgage Disadvantages:
Even though locking in a favorable rate of interest is a benefit, it also has certain disadvantages. Why, because these homeowners are re-financing to get a favorable rate of interest and will not be capable of getting an advantage if that subsequent rate of interest drops without refinancing it again in the future. It results in the homeowner incurring further closing costs when they re-finance it again.
ARM Advantages:
An ARM type of re-finance is suitable for the situations where there is an expected drop of an interest rate in the short future. Skilled homeowners who can predict the economic trends and also the rate of interest might consider an ARM. But, rate of interest is tied to many distinct factors and industry experts may raise it unexpectedly despite their predictions.
Predicting the future, homeowner would find it difficult to decide whether an ARM is a best way of re-financing or not. But, this type of homeowner either relies on their own instincts or the best selection of a fewer risky options.
ARM Disadvantages:
Obviously, the disadvantage of an ARM is that the rate of interest may increase significantly and unexpectedly. When this situation occurs, the homeowner might suddenly find themselves with a significant increase in payments. It can often occur that a clause in the financing terms prevents the rate of interest from being lowered or raised over a specified percentage during a particular time.
Hybrid Re-Financing Mortgage:
Undecided homeowners can find some aspects from both the fixed and adjustable rate mortgage to be appealing, for that there is a hybrid Mortgage. This type of loan is one that combines elements from both the ARM and FIR loans. They can be set up with an initial period at a fixed interest rate which is later converted to an ARM. With this, the lender gets an introductory fixed rate benefits, but most homeowners feel this is quite risky and often not utilized.