Variable rate mortgages have their advantages, but when interest rates are low it's common to see banks and lenders advertising fixed rate mortgages and fixed rate refinancing.
Refinancing in this circumstance can be a smart financial move for certain consumers.
What is a Fixed Rate Refinance? A fixed rate refinance entails exchanging your current variable rate mortgage for a new one at a fixed interest rate.
The new fixed rate mortgage is used to pay off and replace the old one.
A fixed rate mortgage provides the security of knowing that your mortgage payments will remain the same from month to month and year to year, even if interest rates for other loan products rise steeply.
Refinancing your mortgage to a 15 year or a 30 year mortgage rate that is fixed can take the stress and uncertainty out of building your home equity and your investment in your home.
Why Would You Refinance Your Adjustable Rate Loan? Many consumers choose an adjustable rate mortgage to secure a lower initial interest rate in exchange for the risk of having a higher interest rate at the time that the loan adjusts.
While this may be a good way to secure lower payments initially, refinancing to lower the interest rates can make sense if the mortgage is due to adjust to a higher rate.
By moving to a fixed mortgage, some consumers can save money on monthly payments or trade an increase in monthly payments for the security of having a set payment that will not increase beyond the fixed amount.
Variable rate mortgages often come with lower initial rates than a comparable fixed rate mortgage.
It can also be easier to secure a variable rate loan than a fixed rate loan if you have less than perfect credit.
This is because banks stand to make significantly more money on a variable rate in the long run - if interest rates rise (as they inevitably will), your payments can skyrocket and end up costing you far more than a loan whose rate is fixed.
When rates begin to rise - or even, in some cases, shortly before they do - many homeowners choose to refinance to a fixed rate instead of incurring the risk of a variable rate loan.
Advantages and Disadvantages Timing is the biggest issue when refinancing to a mortgage with a fixed interest rate.
You want to be sure to lock in the lowest possible rate - especially if your loan is for a term of 15 or 30 years - but you also want to avoid jumping the gun and losing out on periods where the market is better for a variable rate mortgage.
An analyst or banker can help with these types of decisions, although there is always some degree of uncertainty when attempting to predict market fluctuations.
If you're considering refinancing because your mortgage payments have already risen sharply, you'll have to make the best of a bad situation.
Mortgage refinancing can help, provided your home's value hasn't decreased to an extent that refinancing is impossible.
Most fixed rate mortgages will appear to save you money by offering lower monthly payments, but it's important to do the math and consider the amount you'll be spending over the lifetime of the loan.
If you're switching from a 30-year variable rate mortgage that is 10 years old, you'll probably end up paying more over the term of a new 30-year fixed rate mortgage than you would by staying with your present mortgage for the next 20 years.
Even so, paying smaller monthly payments that equal a larger sum in the long run may be the best option if you're struggling to keep up with your current payment amounts.
Take the time to shop around and compare available rates and offers for fixed interest rate refinancing before signing anything.
Any fees involved with getting out of your present mortgage early as well as closing costs on the new loan should also be factored into your decision.