If you’re in the process of refinancing your home mortgage, you might be wondering what type of interest rate is right for you. There are two basic types of mortgage rates to choose from when refinancing your home. In a previous article I discussed the pros and cons of Adjustable Rate Mortgages; today we’ll discuss the merits of refinancing your home loan with a fixed rate mortgage.
What Are Fixed Rate Mortgage Loans?
Fixed rate mortgages are simply mortgage loans with a contracted interest rate that does not change for the entire duration of your loan. This means that your mortgage payment will never change due to market or economic conditions. Your interest rate and payment amount are “locked-in” as long as you keep the loan.
What are the Advantages of Fixed Rate Mortgage Loans?
While it’s true that fixed rate mortgages typically come with higher interest rates than a similar Adjustable Rate Mortgage, the amount of risk associated with these loans is significantly lower. Because Adjustable Rate Mortgages change their interest rate and payment amounts over time you’ll always run the risk of payment shock. If you have a low tolerance for financial risk and need a mortgage payment that you can plan your budget around consider refinancing with a fixed rate mortgage.
If you are an individual that takes chances with your finances you could benefit from an Adjustable Rate Mortgage. These mortgages come with much lower payments and when used correctly you can minimize the risk. Adjustable Rate Mortgages are great for homeowners that need short term financing with an ultra-low payment. There are a number of choices for your Adjustable Rate Mortgage including interest-only and option mortgages. You can learn more about choosing the best Adjustable Rate Mortgage for your situation with my free mortgage tutorial.
How Your Interest Rate Determines Your Mortgage Payment
There are two factors that determine your mortgage payment amount. These factors are the mortgage rate you qualified and the term length you choose when refinancing. Term length is the amount of time you have to repay your mortgage and determines your loan’s amortization schedule. The length of term you choose is inversely proportional to your payment amount. Loans with short term lengths have higher payments and those with long term lengths have lower payments. If you need the lowest possible mortgage payment there are now loans available with 40 and 50 year term lengths.
Choosing the best type of mortgage rate for your situation should be an easy decision. Finding a loan originator that will not charge you Yield Spread Premium when refinancing your loan will be much more difficult. Yield Spread Premium is the unnecessary markup of your mortgage interest rate to give your mortgage broker a bonus and is the reason most homeowners in the United States overpay for their mortgage loans. You can learn more about your mortgage refinancing options, including expensive pitfalls to avoid with my free video tutorial. You can register today for free by clicking the DVD image at the top of this page.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
