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Choosing Between Fixed-Rate and Adjustable-Rate Options
When making decision about refinancing their home homeowners will have to choose whether to refinance with a fixed-rate mortgage, adjustable-rate mortgage or a hybrid loan representing a combination of the first two. These optionas are pretty much self-explanatory: with fixed-rate mortage, the interest rate does not change throughout period of teh loan, with adjustable-rate mortgage the interest rate is tied to some official reference rate (e.g. prime index). There can be some additional clauses, which limit possible fluctuations and thus prevent drastic rises or drops in the interest rate during specific period of time. This is a safety measure for both the homeowner and the lender.
Advantages of Fixed-Rate Mortgage
Refinancing with a fixed-rate is the preffered choice for homeowners with a good credit standing, who are able to obtain a favorable low interst rate.
Disadvantages of Fixed-Rate Mortgage
Having a locked-in interest rate can simultaneously become a disadvantage. In case interest rates drop, homeowners with a fixed interest rate will be paying higher interest cost than the market unless they refinance again. Refinancing involves closing costs, which can be an obstable for refinancing unless interest rates change significanly enough to cover for the closing costs.
Advantages of an Adjustabe-Rate Mortgage
An Adjustable-rate refinancing option can be considered favorable for situations when interest rates are predicted to decrease in the future. Homeowners who feel they have sufficient enough economic knowledge may feel that the adjustable-rate mortgage is the right choice for them. However, in doing so one should keep in mind that there are many factors involved in determining interest rates and they are impossible to predict with 100% certainty. Further on, mortgages are typically long-term loans, during which interest rates may fluctuate up and down. In general, fixed-rate mortgage is considered a more risk-free alternative than adjustable-rate mortgage.
Disadvantages of an Adjustabe-Rate Mortgage
The obvious disadvantage of the adjustable-rate refinancing is that interst rates may rise unexpectedly and quite significantly. In such situations a homeowner may find himself in a situation where his mortgage payment increases significantly over a short period or time because of higher rinterest rates and the monthlymortgage payment exceeds what the homeowner originally budgeted for. Typically, however, there are some limits as to how much an interest rate is allowed to fluctuate over a period of loan, which serves as protection for the homeowner and the lender.
Hybrid Re-Financing Alerternative
If a homeowner cannot clearly decide between fixed-rate and adjustable-rate refinancing, he may consider hybrid refinancing alternative. Hybrid mortgages typically offer a fixed rate for the beginning period of the loan and subsequently swith to adjustable-rate. Oftentimes, the lender will offer an attractive fixed rate for the beginning period to encourage the borrower (homeowner) to choose this refinancing option. An adjustable-rate can also be offered for the beginning period of the loand and then change to a fixed-rate loan. Homeowners should be very careful when choosing this option to make sure that the interest rate used after the introductory period are acceptable to them.