The housing market is a fickle thing. It goes up. It goes down. Sometimes it gets harder and harder to pay your mortgage. While there is no rule of thumb for the maximum payback period or break-even point, most borrowers looking to make their monthly payments more affordable can really do wonders. Here is everything you wanted to know about the refinancing experience.
ARM vs. Fixed Interest Rate
Lenders and mortgage brokers will often advise borrowers to opt for a fixed-rate mortgage as opposed to a hybrid loan of adjustable-rate mortgage (ARM). This is often because the interest rate differential isn’t large enough to warrant the higher risk associated with an ARM. However, the decision can get a little more complicated when borrowers who have an ARM want to eliminate the risk of a higher rate in the future. In these cases, refinancing to lock in a fixed rate might actually make sense, even if the payback period isn’t as attractive.
Longer or Shorter Term
There is significantly much less consensus on whether borrowers should refinance into a new loan with a longer or shorter term than the original. In fact, this is where a lot of professionals divide themselves. Typically, a fifteen-year loa has become increasingly popular. Especially for homeowners who are looking to refinance. However, shorter terms are only appropriate for homeowners who have substantial savings and excellent job security. Without these safety nets in place, there is a significant risk that the much higher payments on a fifteen-year loan could end up becoming a significant burden if a homeowner ends up losing their job or suffering from an illness or disability in the future.