Choosing the Right Type of Loan in a Refinance

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In this article:
  • When rates are stable and low, ARMS can be a good choice for consumers.

ARM v. FRM

No one can deny the fact that refinancing is heating up across the country. This means more consumers like yourself are going to be making important mortgage decisions in the coming weeks. When you do, there are always going to be a lot of things to consider. One of the first choices you will make is whether you are looking for a fixed-rate or adjustable-rate mortgage. In the past, fixed rate mortgages were considered safe and more economical for those who are looking at staying a long time in their home. Today however, adjustable rate mortgages could be the key to saving thousands of dollars sooner than you might think.  

What’s the difference between fixed- and adjustable-rate mortgages?

In a nutshell, it is the way the interest rate is calculated. A fixed-rate mortgage (FRM) has a consistent interest rate that is agreed upon prior to the closing of the loan. An adjustable-rate mortgage (ARM), on the other hand, has a floating interest rate. This means that your monthly payments will vary somewhat as the interest rate moves around with the market. The length of the terms is also different. FRMs tend to be spread over many years (usually 15 to 30), whereas ARMs typically have a cycle of 7 years or less.

What makes ARMs better today?

Because of the risk involved with having an interest rate that moves with the market, the initial interest rates are much smaller than rates for FRMs from a given lender at the same time. Since no one is expecting interest rates to move much up or down in the coming months, choosing a loan that takes this into account is a good idea.

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