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San Diego downtown real estate broker

Bob Schwartz, CRS, GRI 

Certified Residential Specialist

 


 

San Diego, California 92101

Telephone - Cell:
(619) 300-8819

Facsimile:
(619) 229-0048
E-mail:

 brokerforyou@gmail.com

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Picking a Fixed or ARM Option



One of the most important decisions a homeowner will have to make when deciding to re-finance their home is whether they wish to refinance with a fixed mortgage, an adjustable rate mortgage (ARM) or a hybrid loan which combines the two options. The names are pretty much self explanatory but basically a fixed rate mortgage is a mortgage where the interest rate stays steady and an ARM is a mortgage where the interest rate moves. The amount the interest rate varies is normally tied to an index such as the prime index. Additionally there are generally clauses which prevent the interest rate from lifting or dropping dramatically during a specific period of time. This safety clause supplies protection for both the homeowner and the lender.

Benefits of a Fixed Option

A fixed re-financing option is best for homeowners with good credit who are able to lock in a favorable interest rate. For these homeowners the interest rate they are able to hold makes it useful for the homeowner to re-finance at the new interest rate. The large advantage to this sort of re-financing options is stability. Homeowners who re-finance with a fixed mortgage rate do not have to be concerned about how their payments may shift during the course of the loan period.

Disadvantages of a Fixed Option

Although the capability to lock in a favorable interest rate is an advantage it can also be considered a disadvantage. This is because homeowners who re-finance to obtain a favorable interest rate will not be able to take advantage of subsequent interest rate falls unless they re-finance again in the future. This will result in the homeowner incurring additional closing costs when they re-finance again.

Benefits of an ARM Option

An ARM re-finance option is desirable in situations where the interest rate is expected to drop in the near future. Homeowners who are talented at predicting patterns in the economy and interest rates may think about re-financing with an ARM if they expect the rates to plummet during the course of the loan period. However, interest rates are tied to a number of varying parts and may lift unexpectedly at any time despite the predictions by industry experts.

A homeowner who can predict the future would be able to figure whether or not an ARM is the best re-financing option. However, since this is not feasible homeowners have to either depend on their instincts and hope for the best or pick a less risky option such as a fixed interest rate.

Downsides of an ARM Option

The most obvious disadvantage to an ARM re-financing option is that the interest rate may lift dramatically and rapidly. In these situations the homeowner may suddenly find themselves paying considerably more each month to compensate for the higher interest rates. While this is a downside, there are some aspects of protection for both the homeowner and the lender. This often comes in the form of a clause in the terms of the contract which prevents the interest rate from being raised or lowered by a specific percentage over a specific period of time.

Consider a Hybrid Re-Financing Option

Homeowners who are undecided and find certain parts of fixed rate mortgages as well as specific factors of ARMs to be appealing might contemplate a hybrid re-financing option. A hybrid loan is one which combines both fixed interest rates and adjustable interest rates. This is commonly done by supplying a fixed interest rate for an introductory period and then converting the mortgage to an ARM. In this option, lenders typically offer introductory interest rates which are extremely enticing to convince homeowners to select this option. A hybrid loan may also work in the opposite way by offering an ARM for a certain amount of time and then changing the mortgage to a fixed rate mortgage. This version can be pretty risky as the homeowner may discover the interest rates at the conclusion of the introductory period are not desirable to the homeowner.

 

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