What should you consider when deciding between a Fixed Rate Mortgage and and Adjustable Rate Mortgage for your next California Refinance?

Before you can determine which loan is best for you, let's go over the difference between the two:

What is a Fixed Rate Mortgage?

When you obtain a fixed rate mortgage for your next California Refinance, your interest rate for the entire term does not change.  There are the standard 40-year, 30-year, and 15-year terms as well as 20-year and 10-year fixed rate terms however few lenders offer the 20-year or 10-year.  Some lenders do offer the option of having the first 10-years of your 30-year fixed rate loan be an interest only payment.  In this case, your rate remains the same (as the traditional 30-year fixed rate loan) for the entire term however your first 10 years have payments based on an interest only payment.  This will give you a lower monthly payment and have the security of a 30-year fixed interest rate.

What happens after 10-years?  Your payment (not interest rate) adjusts based on your balance after 10 years.  So depending where your balance is (either it will be the same because you've not paid any of it down in the 10 years or it will be lower if you've paid the balance down), your payment will adjust higher or lower.  Some people confuse the term 30-year loan with a 30-year fixed rate loan.  When obtaining your fixed rate quotes, always be sure to ask:  Does this rate ever change at any point in time during the 30-years?

What is an Adjustable Rate Mortgage?

An adjustable rate mortgage for your next California Refinance simply means at some point in time your interest rate will adjust. Most California Refinance mortgage loans that have adjustable rates are usually fixed for 3-5 years (rate does not change during that time frame) and then after that fixed period of 3-5 years the interest rate adjusts.  There are adjustable rate mortgages with fixed terms as short as 1 month and as long as 10 years.  Two key components to adjustable rate mortgage loans:  The index the loan is based on (most are based on the 1 year LIBOR index) and the margin attached to the index when your rate starts it's adjustment period.  It is absolutely imperative that you always ask what is the index based on and what is the margin associated with the mortgage.  Not asking this could and most likely will cost you thousands of dollars.  Interest only payments are popular with adjustable rate mortgages, and usually the interest only period is 10-years however make sure you find out for sure before you sign loan documents.

Most (not all) adjustable rate mortgages adjust once per year after their fixed period.  Some adjust every month, every quarter or every six months.

Which type of mortgage should you choose?

There are many factors that go into making this decision and you should always discuss the pro's and con's of both loans with your loan officer.  However a good rule of thumb is this:  If you are sure you will be selling the home or refinancing the mortgage in a certain time frame (for this example 4-6 years), then consider an adjustable rate mortgage with a fixed period slightly longer then your anticipated time frame (for this example I would go with a 7/1 adjustable rate mortgage).  If you plan on keeping not only the house but also the loan for the "long term" (at least 10 years) then go with a fixed rate.  Again, discuss your options with your loan officer as every situation is different.

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