Mortgage and Insurance Forum

[Tristan]

I'm looking to refinance my fixed rate mortgage. It appears that I can get a very low variable rate for a few years, and then I would need to refinance again to lock in the fixed rate. This idea is a bit of a gamble, as I don't know what rate I'd be locking into in the future. I am very hesitant to try for that reason. Does anyone know anyone who has done this? How did it work out?

[Alex Chris]

Simply, a fixed rate loan cannot change over the life of the loan. Thus your principal and interest payment will remain the same. The peace of mind of knowing your loan terms will not change is the most popular reason a fixed rate is chosen. With a variable rate loan, you risk having your mortgage payment increase when certain indexes in the marketplace rise higher than what they were at the onset of your loan. Historically, when you apply for a mortgage loan, variable rate loans are more attractive in the short term, since they typically have a lower interest rate for the initial period. The loans I refer to, called Hybrid ARMS, typically have a period of 1, 3, 5, 7, or 10 years in which the rate is fixed. After that period expires, the rate is subject to current market conditions (this is when the rate can rise or fall depending on the index upon which the loan is based). The factors to consider before choosing a variable rate loan over the security of a fixed rate loan are:

1. How long do you expect to own your current home?
2. How much is the difference in your monthly payment on a variable rate verses the fixed rate loan?
3. How prepared are you financially to adapt to an adjustment in the rate, if you were to hold the loan past the initial fixed period?