Buying a home is huge -- one of the biggest decisions you'll ever make. And when you have a home, refinancing your mortgage for a better deal is a pretty big step, too.
Once you've made up your mind to move forward in either case, you'll face another very important choice right away: fixed-rate mortgage -- or ARM?
And we don't mean this kind.
A fixed-rate mortgage means no surprises. It's a home loan with an interest rate that doesn't change. The principal and interest part of your monthly payment also will essentially stay the same for as long as you keep the loan.
The term ARM -- the kind without biceps and triceps -- is short for adjustable-rate mortgage. It's the fixed rate's more unpredictable brother. Typically, the interest rate is frozen for at least a couple of years, but then it can move up -- or down -- in sync with a benchmark interest rate such as Treasury bond yields.
A fixed-rate mortgage gives you peace of mind. That rate isn't going anywhere!
But an ARM can offer something more tempting: a lower rate, at least in the beginning.
If you take out an ARM just as the couple next door gets a similar mortgage with a fixed rate, you'll be the one bragging about the better rate and lower costs. But if interest rise later on and your ARM resets higher, the neighbors could be the ones feeling superior.
And will you REALLY want that?
At Bankrate.com, you'll find an "ARM or fixed-rate" calculator to help you decide which mortgage is for you.
Insider tip:
Still not sure whether you want to go with a fixed-rate mortgage or an ARM? Then you need to ask yourself one key question: How long do I plan to stay in the house?
If it could be for a long time, you probably want the security of a fixed rate. If you might be outta there in a few years, you probably want to grab an adjustable-rate mortgage for the low rate. There are ARMs that don't start adjusting for three, five or even 10 years.
When you buy a place to live, you want a loan you can live with. So make sure you understand your options.