Below is a continuation of our focus on traditional refinancing options for consumers. Please be advised that new legislation has caught steam in Congress that would put open up an ability to refinance through new initiatives with FHA loans to millions of Americans.
Fixed Rate Mortgage—Borrowers who are preparing to permanently stay in their home often choose a fixed rate mortgage to refinance. The most popular terms are 30-year or 15-year fixed. Borrowers who like stability and no surprises tend to go for fixed rates because the rates are steady.
One drawback, however, is that mortgage payments will go up if borrowers refinance an existing loan for a shorter term. On the other hand, borrowers will ultimately end up paying more principle and less interest, which means that the equity of the home starts to add up.
Adjustable Rate Mortgages, or ARMs—In this option, the interest rate of the mortgage adjusts over a period of time, eventually resulting in a higher mortgage monthly payment. An ARM is a great refinancing option for borrowers that foresee an increase in income, if the fixed rate is too high, or for those planning on living in their home for a short period of time.
The interest rates for ARMs are usually lower than those carrying a fixed rate. Some choose ARMs because they usually do not have to pay prepayment penalties if they choose to refinance in the future. However, some struggle with their ARMs if interest rates drive their mortgage rates to significantly increase in a short time period.