Helpful Mortgage And Real Estate Advice

What Happens If Interest Rates Decrease And I Have A Fixed Rate Loan?

By on November 18, 2013 in Mortgage Rates, Mortgage Videos

When applying for a mortgage or refinancing a present mortgage, a borrower may choose between a fixed rate mortgage or an adjustable-rate mortgage. Just as the name would suggest, an adjustable rate mortgage is one in which the interest rate may vary over time. Current homeowners often consider refinancing when interest rates go down to save on monthly payments. Before embarking on a refinance, a homeowner must understand how ARMs work.

When to Choose an Adjustable Rate Mortgage

The United States Department of Housing and Urban Development (HUD) has a few simple guidelines that make it easy to determine whether refinancing to an adjustable-rate mortgage might be the best idea. Mortgage experts and HUD suggest that homeowners who plan to stay in their home for at least 18 months, and who are able to secure an interest rate that is at least 2 percent less than their present rate, will benefit from refinancing to an adjustable-rate mortgage.

Fees Expected with an ARM

When embarking on a refinanced mortgage, it’s essential to be aware of extra fees and charges that may be added into the amount owed. A refinanced mortgage is, in essence, a completely new loan and as such may require origination fees and application fees, just as if the mortgage were a brand new loan. These fees must be added into the new balance, to help a homeowner determine whether refinancing is the way to go.

Additional Factors to Consider

Another decision to make when deciding upon a fixed rate mortgage is the overall length of the loan. Traditional time frames may be 15 or 30 years; however, some lenders have started offering alternative time frames such as 18 or 24 years. A shorter loan of 15 years may offer a homeowner a lower rate; however, the payments will be as high or higher than the payments required of a 30-year loan.

During the refinancing process, homeowners also need to choose the initial interest rate period where the rate won’t change. Popular time frames include 3, 5, 7, and 10 years. After the introductory period, the interest rate will change as often as every year. With current rates at historic lows, a longer fixed period makes sense.

Every borrower is a little different and with so many variables, deciding to refinance does require some time spent with a mortgage calculator. The family’s current budget, as well as future economic conditions, will influence whether an adjustable-rate mortgage is a good idea.

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About the Author

About the Author: Jessica Lucas is the managing editor for Mortgage Home Base, a top real estate finance blog dedicated to helping borrowers and home buyers understand the home loan process. Follow Jessica on Google +, and share your comments here. .
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