The type of mortgage loan you select will depend on how long you expect to continue living in your current home, your reasons for refinancing, and the amount of the monthly payment you can comfortably afford. If you expect to remain in your home for several years, you may want a fixed-rate mortgage that will ensure that your interest rate will remain the same for as long as you have your loan. Although the amount of your monthly payment may increase with a shorter term loan, you will reduce the interest you owe on the loan, while building up the equity faster. Because the index values fluctuate, homeowners may also change from one type of ARM to another or refinance with the same type of ARM to get a lower rate.
ARMs feature an interest rate that moves up and down as market conditions change.
A typical ARM that adjusts annually may have a per-adjustment cap of 2 percent and a lifetime cap of 6 percent. For example, if your mortgage starts at 6 percent, it could increase to 8 percent after one year. Over time, however, it would not be higher than 12 percent because of the 6 percent lifetime cap. When considering refinancing with an ARM, it is important to understand how often your mortgage will adjust and how much your payment can change with each adjustment and over the life of your loan. If you are planning to move within the next few years, you might want to consider a balloon or Two-Step Mortgage .