Refinancing a home means restructuring the loan that you currently have. You have two basic choices to consider: a fixed rate or an ARM loan. A fixed rate loan simply means that the loan’s interest rate remains the same throughout the entire term of the loan. It will always be the same. In an ARM loan, the interest rate fluctuates, generally with the fluctuations of the Prime rate or other indexes. Here, you can benefit from lowered interest rates but may also need to consider the times when these rates may go up.
How To Decide Between An ARM And A Fixed Rate
There are many things that play a role in which of these options is right for you. For example, you should consider how flexible you are in making payments that are not the same all the time. This year your loan may be a percent higher than last year. Could you handle this type of increase? Most ARM loans do have a limit to how high they can go. For example, it is common to see a the maximum that it can go up or down at 1 percent per year, with a total increase no more or no less than 5 percent over the term of the loan. A fixed rate can be a better solution for those that need a loan that has a stable amount of payment every month.
On the other hand, though, those that are looking to potentially save money can consider an ARM if they believe that interest rates are going to be lowers over most of their loan period. Often, interest rates on loans that are ARM (or adjustable rate mortgages) are lower to start with than those that are fixed. These aspects need to be taken into consideration. Talk to your lender about the different options in an ARM and a fixed rate for your mortgage refinance.
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