Which is the Best Way to Go When Refinancing?

Like most things, determining which loan is right for you will depend on your circumstances and your personality. Many people prefer the security of a fixed rate mortgage – the peace of mind that comes with knowing their interest rate is fixed and their monthly mortgage payment will stay the same from one month to the next. Others prefer an adjustable rate mortgage (ARM), a mortgage with an interest rate that is lower than a fixed rate mortgage and is adjusted periodically.

Fixed rate mortgages are popular right now, especially with interest rates so low. These mortgages can be written or re-written for any loan term, 30 years, 15 years or whatever term is left on the existing mortgage you have. You also have the option of taking advantage of low interest rates to shorten your loan term and pay off your loan sooner. Your payments will be higher, but knowing you will be mortgage free that much sooner may make the sacrifice worthwhile.

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An adjustable rate mortgage, as its name suggests, is a mortgage with an interest rate that is not fixed and is adjusted periodically – typically after one, three, five, seven or 10 years. These mortgages offer the best interest rates available and the one-year ARM offers the most attractive interest rate of all. Lenders will notify you about four months before the rate changes and generally cap the rate so you will know the interest rate and your monthly payment will never increase beyond a certain point. An ARM offers lower rates initially, but there is no guarantee that the rate you pay will not increase. If this uncertainty troubles you, opt for a fixed rate mortgage.

When evaluating loans, start by comparing the annual percentage rate – the total charge for credit calculated on an annual basis and stated as a percentage. This rate includes interest and loan fees such as points (a fee charged by lenders equal to one percent of the mortgage principal). Also consider how long you expect to live in your home. If you move frequently, an ARM may be right for you. Many people who chose an ARM plan the adjustment period to coincide with the time they expect to move.

If you think you'll sell your house within five or six years, a five-year ARM might work best for you. The interest rate for a five-year ARM is a favorable one: generally more than a one-year ARM but less than a 15-year fixed-rate mortgage.