Refinance Advice

Adjustable Vs. fixed Mortgage

When is a good time to select an Adjustable Rate Mortgage?
[VS]
When is a good time to select a Fixed Rate Mortgage?

The easy answer is that it's a good idea to choose a fixed rate mortgage when you plan on spending the rest of your life in the house that you are about to purchase or refinance.

However, as with most Americans, homeowners rarely live in their home for more than 5 years before wanting something larger, or different, or circumstances force them to move to another location. In this case a 5 year program or a 7 year program would be the ideal choice. The loan is amortized over 30 years but then after 5 or 7 years the loan becomes adjustable. The advantage of this type of loan over a fixed 30 year loan is that there is a significant reduction in the interest rate.

Another popular type of loan program is the 2 or 3 year loan program. Here the loan is also amortized over 30 years but the interest rate is fixed for only the first 2 or 3 years, whereby it then turns to an adjustable rate. The advantage of this type of loan is that the interest rate is even lower than the 5 or 7 year adjustable program.

This type of loan can also be very helpful if you have poor credit, because with this loan program you have 2 or 3 years to improve your credit while paying lower (easier to pay) monthly payments. After 2 or 3 years you can then refinance into another loan using your improved credit.

Or if you are new to an area you might choose this type of loan so that you can own your home in the new location, settle in with your new job and then take the time to find a more suitable home in the neighbor where you really want to live.

There are other situations where a 2 or 3 year program is best. These are but just a couple of the possible scenarios associated with this type of loan program.