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Buying a Home -
Financing
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Home loan plans fall into three simple categories: fixed-rate loans, adjustable-rate mortgages, and hybrid loans, which have features of fixed-rate loans and ARMs.
Fixed-rate mortgages have interest rates that don't change during the life of the loan. The interest rate on an adjustable-rate mortgage (ARM for short) adjusts every six to 12 months, or every month, depending on the terms of the loan. When interest rates fall, the ARM interest rate usually falls, but the opposite is true when interest rates increase.
Adjustable-rate mortgages "are tied to an index which is a measure of the lender's cost of borrowing money. As the index rises, so will the interest rate on the adjustable loan," according to Dian Hymer, author of "Buying and Selling a Home, A Complete Guide," Chronicle Books, San Francisco; 1994. Common indexes include Treasury Securities (T-Bills), Certificates of Deposit (CDs), and Libor (London inter-bank offering rate). Most metropolitan newspapers publish current ARM index rates.
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Buying a Home -
Financing
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When is the best time to refinance?
The traditional answer to that question is when interest rates fall 2 percent below your current mortgage interest rate. However, in recent years some experts have argued that refinancing may be appropriate with a smaller point spread.
Some weight is often given to the length of time the owner anticipates holding on to the property. If the owner expects to keep the property for at least three or four years, then refinancing may be worthwhile. While refinancing can involve upfront costs, in many cases it is possible to roll the costs of the refinancing into the new note and still reduce the amount of the monthly payment. |
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