Refinancing: Does it go Better with Fixed Rate Mortgage or Adjustable Rate Mortgage is Better Option

Let us deal with an issue, which sounds simple but eventually brings out Refinancing as a solution to many issues. Suppose you mortgaged your home for say any financial reason. Now you are in a position to pay off this mortgage. This will definitely give you a feeling of security feel and peace of mind. But it will be like having hidden money that is not providing any return. Generally, it depends on your personal situation whether to continue with the mortgage or pay it off. If you have good and regular source of income and you invest in other areas such as real estate, stocks etc, or, if you want to live under your own roof and want to clear out all debts in future then it is better to pay off. But beware paying off your mortgage slowly can give you better dividends. The money needed to pay off the mortgage can be applied in other investment portfolios and give you better returns. Various tax deduction schemes are available for the mortgage interests.

Suppose you are on a fixed income and plan to live in your home for more than 12 years, you take up 20,25 or 30 year fixed mortgage plan. The long fixed term means there is no change in monthly installment or interest rate. Suddenly you realize that interest rates are dropping or your fixed income source has become shaky – then the only option left for you is to refinance your mortgage. The interest rate drops when you switch to refinancing, further dropping the monthly installment, and giving you a sigh of relief. Around a decade ago, paying off the mortgage was the primary financial goal of almost everyone. Even for shorter terms o say 10 to 15 years people took up Fixed Rate Mortgage. Shorter terms build equity faster and more amounts were diverted towards your principal amount, thus paying off the loan much faster. However, when compared with adjustable rate mortgage, it was more expensive than a shorter term adjustable program as it meant giving up a valuable interest rate tax deduction.

Ideally getting lowest fixed rate possible is the best way, but you also have to consider your situation. If you're in the first year of an adjustable rate mortgage (ARM) and you plan on moving in three years, it probably does not make sense for you to refinance. However, if the rate on your ARM is about to adjust and you think the rate will go up, then it may make sense to get a long term fixed rate mortgage, especially if you don't plan on moving in the next seven years or so. Then you can again go refinancing through fixed mortgage, in case rates drop further.

With Refinancing as a new road to savings, ARM i.e. adjustable rate mortgages of 2, 4, 6 or 7 years are becoming more popular. A short term fixed rate means interest savings during the initial interest rate period (up to 7 years) as compared to a 30 year fixed. An ARM that is refinanced every 3 to 5 years is the successful theory of many happy homeowners.