Is your perfect refi fit a fixed or adjustable rate?
Posted by Joelene
Tue 08 December 2020
You’ve had your eye on a refi for a while now. Hell, you’ve even downloaded an app to keep you up to date with where interest rates are at. And now it’s feeling like the perfect time for you to hit the ground running and hopefully nab yourself some solid savings.
But, like anything in life, there are options to toss-up. If you’re the indecisive type who spends half the night flicking through streaming services rather than actually watching anything on the TV, you might not have decided what kind of home loan you’re going to go for.
So, fixed or ARM? Both have benefits and both can lead to some great savings for you.
Let’s get into when to consider an ARM refi, or a fixed refi — no scribbled down pros and cons lists needed.
Need a quick refresher?
No problem. Digestible education that doesn’t give you a headache is what we’re all about.
An ARM is an adjustable-rate mortgage — Meaning the interest rate will adjust during the life of the loan. ARMs are usually broken up into an initial fixed period, and periodic rate changes depending on what type of ARM you’ve gone for.
i.e. 5/5 means your rate is fixed for 5 years, then adjusts every 5 years. 10/1 means your rate is fixed for 10 years, then adjusts annually for the remainder of the loan.
A fixed-rate mortgage means just that — The interest rate will stay the same throughout the life of your loan, no matter how much interest rates go up and down.
When to give an ARM some legs.
Raise your hand if you never stay in one place for too long.
If you find yourself getting a case of itchy feet every couple of years — an ARM refi might be right up your alley.
ARMs aren’t just a good option for those looking for an uber-low interest rate up-front. Since they offer a few shorter fixed-rate periods — 5, 7, and 10 most commonly — if you’re not planning on staying in your crib longer than a few years, you can make the most of lower rates and get out before they become adjustable.
Caps can help you ride out the adjustable wave.
If you’re keen on sticking out your ARM refi beyond its fixed period, but are a little nervous about where rates might end up, caps could be that security blanket to help ease those nerves.
A rate cap is there to put a limit on rate increases once your fixed period ends, and your adjustable period starts. Most of the time your interest rates will adjust annually with the market, but caps are an important part of an ARM to avoid any nasty surprises caused by huge jumps.
It’s a good idea to check out what the following caps will be with your lender before giving them the green light for that refi:
Initial cap: This is how much your interest rate is allowed to change the first time it adjusts after your fixed period ends
Periodic cap: This guy is the cap on how much your interest rate can increase annually.
Lifetime cap: This is an important one. The lifetime cap represents how much your interest rate can increase from your fixed rate over the life of your loan. If your fixed rate is 2.5% and your lifetime cap is 5%, your loan can only increase over time to 7.5% — but stops there.
Locking down caps that you’re comfortable with can be a huge sigh of relief, but keep in mind that periodic caps can rollover; meaning if rates rise 2% in one year and you have a cap of 1%, the other 1% will be applied the following year.
A low-interest period can also give you the breathing space to pay attention to your principal — you know, that lump sum that feels like it never gets smaller because you’re paying off interest. It’s worth taking a look at how much more principal you can pay off if your interest rates take a dip.
A wild wave to get on top of, we know, but if you’ve got your floaties or some surf lessons you’ll be sweet.
When to lock down that fixed refi
You’ve got some serious forever home feelings.
When you first moved into your home you may have looked around and thought; this is nice but it ain’t The One. Since it was purely just a foot in the door to the real estate market, you locked down an ARM loan at a sweet rate with plans to move into the next one before you knew it.
But fast forward 5 years and you’ve renovated the bathroom (complete with heated floors that everyone says is unnecessary but really was a must-have) and fallen completely in love with your humble abode. Now you’re wanting to stay put, but the fixed part of your loan is coming to an end faster than Kim Kardashian’s second marriage.
If you’re feeling like you’re better off leaving the rate prediction powers to the likes of Buffett, refinancing to a fixed-rate loan could give you the concrete grounds you’re wanting to stay in your home long-term, and build that long dreamt-for pool.
Life is unpredictable, and so is your income.
You might be a contractor, freelance writer, or a clown for kids parties (the cause of many childhood nightmares, but we don’t judge here) — but with the fun and rewarding work comes a slightly unstable salary.
This is where refinancing to a fixed-rate loan is here, cape and all, to save the day so you can go back to writing about the best sofas around.
If those unpredictable rate storms make you want to hide under a blanket and worry about whether you’d still be able to be Pogo the Clown and afford a huge jump in loan payments, it’s a great idea to crunch the numbers on a fixed loan instead.
Nabbing an awesome fixed-rate loan could not only give you the security that you can always make your payments, but you might even be able to save on your payments and get some extra cash to go towards new balloons or that brand new work laptop to fuel your writing creativity.
Go shopping for your best fit
So, where to from here?
Well, you’re now armed with an idea of what kind of rates, caps, and heated floor prices (we know you researched it) you want. The next step is always to see just what you can get.
Lucky for you, we’ve made it simple with our 2-minute rates calculator, so you can see what ARM and fixed refi rates you can get, with plenty more time to hone your balloon animal skills and go floor shopping.