Refinance Interest Rates, Choosing a Fixed, ARM or Hybrid Option

Written By: admin on January 3, 2009 4 Comments

The refinance interest rates already drop to a new record. Finally comes the time where you want to refinance your home. You’re taking the huge D (choice) to refinance your home –and you’re undecided on choosing the Fixed Rate Mortgage or the ARM (Adjustable Rate Mortgage), or perhaps the Hybrid Loan that combines the two.

Just a real basic clue, the Fixed Rate Mortgage is basically a mortgage with constant interest rate, while Adjustable Rate Mortgage is a mortgage with varies interest rate (usually the rate goes along to an index such as the prime index). But, generally there are clauses which prevent the interest rate from rising or dropping drastically during a period of time. It ensures both you and your lender a protection –and less possibility of heart attack.

Now here’re some explanations about the advantages and disadvantages of both mortgages, hope it helps you choose the best option that works for you.

The Advantages:
1) Why should I choose the Fixed Option?
* The Fixed Rate Mortgage is best for you who have excellent credit and able to lock in a favorable interest rate. It is worthwhile to refinance at the new interest rate if you have a excellent start.
* For you who prefers stability and safety. This one is a sure choice.
* For you who don’t want to reckon about how your payments may vary during the loan period, this one is a sure pick.
2) Why the ARM Option Is Best for Me?
* If the situation hints that the interest rate is expected to drop in the near future, ARM Option is a excellent choice.
* If you reckon you have what it takes to predict economy trends, and the rates were expected to drop during the course of the loan period. This is a sure pick.
(What we need to remember is that interest rates are tied to several factors, so despite experts’ prediction, they may rise/ fall unexpectedly at any time.)

The Disadvantages:
1) Why the Fixed Option May Not Be Best for Me?
* When the interest rate drops, you won’t be able to obtain a favorable interest rate and/or take advantage of the situation –unless you refinance again in the future.
* This may result in you incurring additional closing costs if you refinance again.
2) Why the ARM Option May Not Be Best for Me?
* It is obvious. Interest rate may rise significantly and unexpectedly. You may wake up one day and find that you have to pay significantly more each month to compensate the higher interest rates.
(But usually there is a clause in the terms of the contract which prevents the interest rate to rise or lowered by a certain percentage over a specific period of time. Usually people call it ‘caps’. It prevents you and your lender from having a heavy blow during the loan period.)

Then, after reading all those advantages and disadvantages, why am I still undecided? Why there seems to be no best option for me? If that’s what you’re thinking, then you might reckon of this: the Hybrid Re-Financing Loan Option.

It’s not just car that goes hybrid. So does your possible-mortgage!

What is the Hybrid Re-Financing Loan Option?

* Hybrid loan is a home loan that combines Fixed interest rates and Adjustable interest rates. This is done by (usually) offering a fixed interest rate for an introductory period and then converting the mortgage to an ARM. Usually lenders will offer low introductory interest rates to encourage homeowners to pick it. It is also could be the opposite, the lender may offer ARM for a certain amount of time, then converting the mortgage to a fixed rate mortgage. The disadvantages of this, is that the interest rate after the introductory period may be unfavorable towards you.

But, it is best that you compare rates between the three mortgages option, so by doing some calculation, you may choose the better option of refinance interest rates for your home. Dude, life’s all about taking risk –and minimizing the risks to the lowest.