Most loans fall into one of two categories: fixed-rate and adjustable rate.
Fixed-rate loans are generally 10, 15, 20 or 30 years long. They provide a constant interest rate, and monthly principle and interest payment for the life of your loan. The benefits of refinancing your home with a fixed-rate loan are:
Your monthly payment and interest payments will be predictable for the entire life of your loan
You'll be able to spread your payments out to lower your monthly principle and interst payment amount
You won't have to worry about mortgage rates rising
Adjustable-Rate Mortgages (ARM)
Adjustable-rate mortgages generally offer a lower rate than a fixed-rate loan for the first five to ten years of your term. After that, your rate will change with the market index. Here are some benefits and drawbacks of refinancing your home using an adjustable-rate mortgage:
In the beginning of your loan term, your interest rate will be lower than a fixed-rate loan. This saves you money early on, which can be good if you're not planning to stay in your home longer than the initial loan term
Your payments can increase quite a bit when interest rates are rising
As the index goes up or down, your payments will also change at each scheduled adjustment date
There are "rate caps" to limit the amountyour interest rate can go up or down
Deciding Which Loan is Right for You.
Deciding between a fixed-rate and adjustable-rate loan depends on two key factors:
How long do you plan to own your home?
Planning to stay put.
If you plan to stay in your home for more than ten years, you may want to consider refinancing with a fixed-rate mortgage. A fixed-rate mortgage will offer you predictable payments and long-term protection against rising interest rate
Planning to sell.
If you plan to be in your home for ten years or less, an adjustable-rate mortgage could be an attractive option. Keep in mind that should you stay in your home longer than you originally planned, your monthly payments may go up when your interest rate is adjusted if mortgage interest rates are rising.