Refinancing your mortgage can be a smart financial move – from lowering interest rates to reducing your monthly payment or changing the term of the loan, there are multiple compelling reasons to do so.
One of the best reasons to refinance your mortgage is to change it to a fixed rate – it provides protection from rising interest rates, allows for long-term financial planning, and gives you peace of mind when it comes to changing mortgage costs.
So, what are some of the key benefits of refinancing to a fixed-rate mortgage? Let’s take a look:
Fixed-Rate Mortgage vs Adjustable-Rate Mortgage: What’s The Difference?
Before we dive into the benefits of refinancing to a fixed-rate mortgage, it’s important to understand the difference between a fixed-rate one and an adjustable-rate one.
Fixed-rate mortgages:
- Have an interest rate which remains constant during the life of the loan
- Are characterized by long-term consistency when it comes to payments
- Are easier to budget because there are no fluctuations in costs
- Safeguard against rising interest rates, avoiding unexpected increases
Adjustable-rate mortgages:
- Have an interest rate that changes periodically based on benchmarks
- Typically offer lower interest rates, leading to lower initial payments
- After the initial fixed period, rates and payments can increase or decrease
- Include caps that limit the amount the rate can change at each adjustment
Both options have advantages and drawbacks, but in this article, we will focus on the benefits of refinancing to a fixed-rate mortgage.
5 Key Benefits of Refinancing to a Fixed-Rate Mortgage
So, what are the benefits of refinancing to a fixed-rate mortgage, and why should you consider this option when it comes to conventional refinance? Here are some of the main ones:
1. Stable monthly payments
One of the main benefits of refinancing your home loan to a fixed-rate mortgage is predictability.
With this type of mortgage, your monthly principal and interest payments remain constant throughout the lifetime of the loan, and are not impacted by market fluctuations. This ensures stable monthly payments, and makes budgeting easier.
Let’s see two examples if you are taking a $500k mortgage for 30 years at an interest rate of 4%:
- Fixed-rate mortgage: The monthly payment would be approximately $2,387 each month, without fluctuations;
- Adjustable-rate mortgage: Assuming the initial interest rate is lower for the first 5 years at 3%, the monthly payment would be around $2,108. However, it can increase after the initial fixed period based on market fluctuations.
2. Long-term financial planning
Another benefit of refinancing to a fixed-rate mortgage is that it allows for long-term financial planning.
Because it gives you the opportunity to forecast your housing costs over the life of the loan, you can accurately predict your overall expenses without worrying that fluctuating rates will impact your monthly budget.
This stability is also essential for planning and managing other financial commitments, such as saving for retirement, education, or taking advantage of investment opportunities – since you are not constantly adjusting for changing mortgage payments.
3. Protection from rising interest rates
When it comes to refinancing to a fixed-rate mortgage, another key benefit that is worth mentioning is that it provides protection from rising interest rates.
If you refinance when interest rates are lower than your current adjustable-rate mortgage (ARM) or higher-rate fixed mortgage, you can secure a better rate and reduce your overall interest costs. This can lead to significant savings over the life of the loan.
In addition, if you currently have an adjustable-rate mortgage (ARM) and rates are expected to rise, refinancing to a fixed-rate mortgage locks in a low rate, protecting you from future increases.
For example, an adjustable-rate mortgage that is initially at 3% may rise to 5% or more, but refinancing to a fixed-rate mortgage with a 3.5% rate secures stable payments for the long term.
4. Ensuring peace of mind
With an adjustable-rate mortgage, you may worry constantly that interest rates are going to rise, leading to higher monthly payments that may impact your budgeting.
However, refinancing to a fixed-rate mortgage can give you peace of mind knowing that your payments won’t change – which will allow you to plan for other financial goals, such as saving for retirement or another house. Or simply reduce the stress associated with potential interest rate increases.
5. Simplified mortgage management
Refinancing to a fixed-rate mortgage also comes with another benefit: simplified mortgage management.
These types of mortgages are straightforward, with no complex terms or future adjustments, making them easier to understand and manage. They have a predictable payment structure, which makes it easy to integrate into your budget and long-term financial plans.
Fixed-rate mortgage simplicity also gives you more confidence in decision-making, knowing exactly what you can expect throughout the loan term. The final result is reduced financial stress about future payment changes.
What Are The Disadvantages of Refinancing to a Fixed-Rate Mortgage?
As with everything else, refinancing to a fixed-rate mortgage also comes with some disadvantages as well, and it may not be the ideal option for everybody. Here are some of them:
- Higher interest rates – Compared with adjustable-rate mortgages, fixed-rate ones often come with higher interest rates. For example, an ARM might start at 3% for the first five years, while a fixed-rate mortgage might be 4% for the entire term, leading to higher initial payments on the fixed-rate loan.
- Higher initial monthly payments – Due to the higher interest rates, fixed-rate mortgages are often associated with higher monthly payments than adjustable-rate ones compared with the initial fixed period of the ARM.
- Less interest rate flexibility – If interest rates decrease as a result of the changing market conditions, you won’t benefit from this decrease without refinancing again, which may require additional time and costs.
- Higher long-term interest costs – In some cases, refinancing to a fixed-rate mortgage can mean higher long-term interest costs, especially if you plan to stay in your home only a few years.
- Potential prepayment penalties – Depending on the loan and the lender, keep in mind that some existing loans might have prepayment penalties that apply if you decide to refinance to a fixed-rate mortgage, adding an extra cost.
How Do I Know If Refinancing To a Fixed-Rate Mortgage Is Right For Me?
As we mentioned earlier, refinancing to a fixed-rate mortgage has numerous benefits, but it also has some drawbacks – which means that you will have to determine whether this solution is right for you.
Some cases in which it can be a good fit include:
- If you currently have a higher interest rate loan, and now the interest rates have dropped significantly, In this case, refinancing can lower your monthly payments, and reduce the total interest paid over the life of the loan.
- If you currently have an adjustable-rate mortgage, and you are concerned about rising interest rates and how they can affect your monthly payments in the future. Refinancing to a fixed-rate mortgage can give you more financial stability, and a peace of mind.
- If you want to pay off your mortgage faster, this financing solution can be a good option for you. For example, you can refinance a 30-year mortgage to a 15-year one, building equity more quickly and paying less interest over time.
- If you want to leverage cash-out refinancing for major expenses. For example, you can access your home equity to get cash for renovating your house, consolidating multiple debts, or investing in your education.
If you don’t know whether refinancing your mortgage is the right solution for you, don’t hesitate to get in touch with us. Our team of experts will help you determine the right loan for you.
About Jet Direct Mortgage
If you are ready to refinance to a fixed-rate mortgage, Jet Direct Mortgage can help you find the perfect option for your needs and goals.
Our mission is to set a high standard in the mortgage industry through unmatched customer service, from the application process to the post-closing stage.
Our team of experienced professionals will guide you through the home loan process step by step, so you feel confident in your knowledge and make a well-informed decision on the best mortgage for you.
Are you ready to get started? Apply now!
FAQ
How much can I save by refinancing to a fixed-rate mortgage?
The savings from refinancing to a fixed-rate mortgage depend on factors like the difference between your current interest rate and the new rate, the loan amount, and refinancing costs.
Generally, if you secure a lower rate, you can save significantly on monthly payments and total interest over the loan’s life. Calculate your break-even point, where savings from reduced payments offset closing costs, to determine net savings.
Can I refinance to a fixed-rate mortgage with bad credit?
Yes, you can refinance to a fixed-rate mortgage with bad credit, but it may be more challenging. Lenders typically require higher interest rates for borrowers with lower credit scores, which can offset potential savings.
To improve your chances, focus on increasing your credit score, reducing debt, and demonstrating stable income. Consider FHA loans, which often have more lenient credit requirements, or consult a mortgage advisor.
Can I refinance to a fixed-rate mortgage with bad credit?
Yes, you can refinance to a fixed-rate mortgage multiple times, but it’s essential to consider the costs and benefits each time. Frequent refinancing may incur closing costs and affect your credit score, so it should make financial sense, like securing a lower rate or better terms.
Evaluate your break-even point to ensure the savings outweigh the expenses, and consult with a mortgage advisor for guidance.
Experienced Chief Operating Officer with a 20 + year demonstrated history of working in the banking industry. Skilled in all aspects of the residential mortgage market . Strong business development professional with a Bachelor of Science (BS) focused in Business Administration and Management, from St. Joseph College. A direct endorsement underwriter and a licensed Mortgage Loan Originator.