December 15, 2006, Newsletter Issue #43: Refinance – Fixed or ARM

Tip of the Week

With interest rates for home loans as low as they are today, many people are taking advantage by doing a mortgage refinance. If you choose to take out a refinance loan, you will get a lot of options from mortgage brokers out there. There are two main options that you should know about; the difference between a fixed rate loan and an ARM. A fixed rate loan is exactly like it sounds.

The note is written for an amortization term of anywhere from 5-30 years at a fixed interest rate for the life of the loan. These types of loans are preferred for a refinance because they can reduce even the best mortgage rate from a decade ago by several percentage points. An ARM is an adjustable rate mortgage. As opposed to a fixed loan, an ARM will typically be fixed for a short term and them it will adjust based on one of the major financial indexes.

For people looking for a very low payment for only a few years, an ARM is a great solution because of the lower beginning rates. However, should the interest rate go up with inflation, you will see the adjustments on your loan's interest rate. Know the difference between these two types of refinance options before you decide how you will maximize your home value.

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