Choosing a Fixed or ARM Option

In today's world, it seems that almost any topic is open for debate. While I was gathering facts for this article, I was quite surprised to find some of the issues I thought were settled are actually still being openly discussed.

One of the most important decisions a homeowner will have to make when deciding to re - finance their home is whether they want to refinance with a fixed mortgage, an adjustable degree 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 remains constant again an ARM is a mortgage where the interest rate varies. The amount the interest rate varies is usually tied to an index such as the prime index. Additionally there are repeatedly clauses which prevent the interest rate from rising or dropping dramatically during a specific period of time. This safety clause provides protection for both the homeowner and the lender.

Advantages of a Fixed Option

A fixed re - financing option is ideal for homeowners with good credit who are able to lock in a favorable interest rate. For these homeowners the interest rate they are cogent to retain makes it worthwhile for the homeowner to re - finance at the new interest rate. The major gain to this type of re - financing options is stability. Homeowners who re - finance with a fixed mortgage percentage do not have to be stimulated about how their payments may vary during the course of the loan period.

Disadvantages of a Fixed Option

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

Advantages of an ARM Option

An ARM re - finance option is favorable in situations where the interest rate is expected to drop in the near future. Homeowners who are skilled at predicting trends in the economy and interest rates may consider re - financing with an ARM if they expect the rates to drop during the course of the loan period.

So far, we've uncovered some interesting facts about finance. You may decide that the following information is even more interesting.

However, interest rates are tied to a number of different factors and may rise unexpectedly at any time despite the predictions by industry experts.

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

Disadvantages of an ARM Option

The most obvious disadvantage to an ARM re - financing option is that the interest rate may rise significantly and unexpectedly. In these situations the homeowner may suddenly find themselves paying significantly more each month to compensate for the higher interest rates. While this is a disadvantage, there are some elements 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 certain percentage over a specific period of time.

Consider a Hybrid Re - Financing Option

Homeowners who are undecided and find certain aspects of fixed rate mortgages as well as certain aspects of ARMs to be appealing resourcefulness consider a hybrid re - financing option. A hybrid loans is one which combines both fixed interest rates and adaptable interest rates. This is often done by offering a fixed interest rate for an introductory period and then converting the mortgage to an ARM. In this option, lenders typically offer primeval interest rates which are extremely enticing to encourage homeowners to choose this option. A hybrid loan may also work pull the opposite way by offering an ARM now a certain amount of time and then converting the mortgage to a fixed rate mortgage. This version can be quite risky over the homeowner may find the interest rates at the conclusion of the introductory period are not useful to the homeowner.


The day will come when you can use something you read about here to have a beneficial impact. Then you'll be glad you took the time to learn more about finance.