As a result of refinancing, your total finance charges may be higher over the life of the loan.
Fixed or Adjustable
The first question many borrowers face when initially investigating a new mortgage is: Fixed vs. Adjustable. Each one has advantages and disadvantages for Nations Lending’s clients, and these are spelled out below.
One of the benefits of a Fixed Rate Mortgage (FRM) is that borrowers know upfront what their monthly mortgage cost will be for the life of the loan. Since a fixed rate mortgage is extended to borrowers in absolute terms (ex: 4.25% for 30 years), the amortization payment schedule does not change. Many love this feature, and it’s traditionally appealing to those who wish to lock in a certain interest rate for an extended period of time. With a constant monthly payment, there are no surprises or significant changes to the mortgage, which allows for certainty when budgeting. Fixed-rate mortgages are often best for those seeking to stay in a home for an extended period of time.
One disadvantage to a fixed-mortgage rate is that the costs of refinancing when interest rates are low in order to obtain a more competitive rate. Borrowers may end up spending more than those who chose an ARM loan. Along those lines, if mortgage rates should decline a borrower’s fixed-rate mortgage will not, and thus a borrower may have to refinance in order to see the benefits of a declining rate environment.
While the fixed rate mortgage is popular with the majority of borrowers, the Adjustable Rate Mortgage (ARM) is an attractive instrument for those who may not be thinking of month-to-month payment security for the life of the loan but rather may be financing homes for shorter durations, or who may be more rate sensitive. ARMs typically cost less than a FRM for the same interest rate, and are normally offered in a few varieties. They will have a fixed period where the interest rate does not change, followed by a reset period where the monthly payment will be recalculated from the initial interest rate, predicated on the movement of a published index (LIBOR, US Treasury). Offered in 3yr, 5yr, 7yr, and 10yr fixed periods, ARMs tend to lend themselves well to borrowers who may need to move in the near future, have a view on where interest rates WILL BE in the next few years, or who may be using its initial lower interest rate as a “foot in the door” strategy for a new home purchase in a high cost area.
The advantages to an adjustable-rate mortgage can initially translate into lower rate and payments and qualifying borrowers may be able to purchase a more expensive home due to the lower monthly payment. Since payments can cost less, this may allow for more financial freedom and re-allocating expenses towards investments. If interest rates are low and look to remain low for the foreseeable future, then an ARM loan may also saves cost associated to refinancing.
The disadvantages to an ARM loan include a hike in monthly payments if interest rates rise significantly and the inability to understand the margins and caps associated with this type of amortization. For borrowers looking to move or purchase a different home within a few years, an ARM loan may be best. It is certainly worth a discussion with your Personal Mortgage Advisor.