If you are refinancing when rates are high, or are aware of rising rates, you may want to switch to an adjustable-rate loan, or consider fixing your adjusted loan rate for a period of time, to avoid paying more.
One alternative way to keep housing affordable when interest rates are rising is to switch your financing from a fixed rate to an adjustable-rate. Most adjustable-rate mortgages limit how high the interest rate can go during the life of the loan, but are a bit more risky in terms of having a stable, fixed monthly payment. If you’re nervous about this, a hybrid mortgage, also called a fixed-period ARM, might be right for you.
A hybrid mortgage is one that has a fixed interest rate for a period of time, usually for 3, 5, 7 or 10 years. After the fixed interest rate period, the interest fluctuates for the remaining term of the loan. With a 10-year fixed ARM, it’s likely that the homeowner will never experience rate fluctuations because statistics show that most homeowners either sell their home and pay off the mortgage or refinance within 5 to 7 years.
If you think that interest rates are going to rise, you could switch your adjustable loan to a fixed interest rate for a set period. Fixed interest rates are usually slightly higher than variable rates. However, if you fix your loan before a variable rate rise you can make a significant saving on interest.
Many lenders allow you to split your loan. This means that a portion of the loan is fixed, while the rest remains subject to the variable rate. Splitting your loan has several advantages over fixing the entire amount.
If you feel that rates are getting ready to rise, talk to your lender about your options and find the most suitable one for you.
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