Refinancing Questions: Fixed-Rate vs. Adjustable Rate Mortgages

By Gabriel Traverso
LoanPage.com Columnist

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For today's homeowners it may seem that there are simply too many choices when it comes to refinancing. Finding the loan that best suits your needs is critical, your home may be one of the biggest investments you make. Choosing the right mortgage first involves selecting fixed rates versus adjustable, then pinpointing the most appropriate loan from there.

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What Are Your Options?

There are two primary types of mortgage loans: fixed-rate mortgages and adjustable rate mortgages, or ARMs. Which makes more sense depends in part on both your long-term goals and your financial situation.

The Fixed-Rate Mortgage

This is the traditional loan option and is usually set for a term of 15 or 30 years. Based on current mortgage rates, the interest rate remains unchanged for the entire term of the loan.

The Adjustable Rate Mortgage

ARMs may be perfect for homeowners planning to sell in the near future, as it offers tremendous short-term benefits with long-term tradeoffs. This mortgage starts with a lower interest rate that remains fixed for a period of time--anywhere from one month to ten years. After that, the mortgage will reset to reflect current financial market conditions--homeowners should prepare for increases if the market rates are higher.

Use a Mortgage Calculator

Because there are advantages to both loans, it can sometimes help to use a mortgage calculator to make a comparison. A mortgage calculator lets you plug in your current balance, the amount of your loan, rate, etc. so that you can see what your payments will be. It will also tell you how much of your payments cover interest and how much is applied to the principal.

Contact Your Loan Officer

Before you decide which loan best suits your refinancing needs, check with your loan officer. She can guide you through the process, answer questions and help you understand the differences between the two and make a decision that fits your financial future.

Source
Investopedia

About the Author
Gabriel Traverso is a freelance writer, independent musician, and artist. He resides in Reno, NV.

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