Mortgages are your ticket to home ownership. With a mortgage, you can afford to purchase a piece of real estate, even if you only have a small amount of money saved up for a home. However, for first time mortgage applicants, the process can be a bit confusing. One such issue that you have to consider is your interest rate. Interest rates vary from person to person, but they all fall into two categories - ARM or Fixed. Both options may not be available to you at the time of signing, but there are a number of reasons that you should consider refinancing in order to get out of your ARM.
An ARM interest rate is one that fluctuates with time. Interest rates that are adjustable are set to be a set level above the national interest rate set by the federal government. The margin is the number above you’ll have to pay. For example, if you qualify for a +3% interest rate, your rate will be the national rate plus three. Mortgages are borrowed for the course of many years, so of course this rate will change from time to time. One year, you may be paying 6% + 3% for a total of 9%. The never year, if the interest rate rises, you might be paying 8% + 3% for a total of 11%. The constant is the amount you are paying in addition to the regular rate.
With an ARM interest rate, there are certain caps to protect you as the consumer. In most cases, these will be a cap as to how much the interest rate can rise or fall over the course of a year, as well as a cap regarding how much the interest rate can rise or fall over the course of the loan’s life. Most of the time, interest rates will spike in either direction, but just in case, this clause in your mortgage agreement will protect you.
On the other hand, you might be able to get a fixed interest rate for your mortgage. This rate will be, as the name indicates, steady over the life of the loan. For example, you might be paying a 7% fixed rate interest rate. The major disadvantage to this is that when the rate falls and those holding adjustable interest rates reap the benefits, you’ll still be stuck at your higher fixed interest rate.
That said, in the vast majority of cases, it is simply a good idea to refinance for a fixed interest rate, as long as you do so at the right times. Refinancing can be expensive because you have to pay for closing costs once again, but at the same time, if you get the lower interest rate, those costs will be worth your while in the long run. Make sure you refinance at the lowest possible rate in order to see the most advantage. To do this, you have to watch the mortgage market carefully. You may even want to hire a mortgage professional to help you decide when to refinance.
Other than hopefully saving money in the long run, switching to a fixed rate mortgage has other advantages as well. One of the most important is that you’ll know exactly what you will owe every month from now until the loan is repaid. Although you might be able to make a good guess at what your payments will be every month, the interest rates can always change. That means that your payments will be higher some months than others. Unfortunately, budgeting in that scenario is a bit difficult.
And when you can’t budget, it is hard to stay on the right financial track. Even if your debt to income ratio is fairly low, budgeting is still important to ensure that you are overspending on things like food, entertainment, and clothing. In order to be as financially responsible as possible, you have to have a clear budget in mind.
If you debt to income ration is high, though, budgeting becomes even more important. Besides the obvious reasons, without knowing your exact budget every single month, it is easy to become stressed out. When you are stressed, saving money becomes even more difficult. A fixed interest rate can help you avoid problems with stress and your budget.
Are you considering switching to a fixed interest rate? If so, it is important that you consider the costs of refinancing in comparison to the money you’ll potentially save with a fixed interest rate. This option isn’t right for everyone, but for most people, it does make sense.
