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What Mortgage Program is Right for Me?
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What Mortgage Program is Right for Me?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

When you speak with lenders about your refinancing it is helpful to have an idea of the type of mortgage program that is right for you.  You may consider changing your mortgage program when you refinance. For example, you may want to switch from an adjustable rate mortgage (ARM) to a fixed rate mortgage. It is key to select a program that you are comfortable with and what type of loan you choose also impacts your mortgage rate, monthly payment and what size loan you can afford. We review the three main types of mortgage programs -- fixed rate, adjustable rate and interest only -- below and provide a chart at the bottom of the page that outlines the positives, negatives and key features for each program. Reviewing these resources will help you decide the mortgage program that is right for you when you refinance.

How to Select the Mortgage Program that Best Meets Your Needs

So what mortgage program is right for you? It all depends on you risk profile and financial goals. If you are looking for certainty, then a fixed rate mortgage probably works best. If you have a higher tolerance for risk and are looking for a lower monthly payment or larger mortgage amount, then an Adjustable Rate Mortgage or Interest Only Mortgage may be right for you.

If you know you are only going to live in the home for a relatively short period of time such as three to ten years and you are going to sell your home before the adjustable rate period for an adjustable rate mortgage or an interest only mortgage begins, they could be the right program for you. That way you benefit from the lower monthly mortgage payment during the initial period of the mortgage but you are not exposed to a potential increase in interest rates and mortgage payment during the adjustable rate period when the interest rate and mortgage payment can change and potentially go up on an annual or semi-annual basis. This approach is not without risk either, as there is no guarantee you could sell your property for more than you paid for it.

Review our What Mortgage Program is Right for Me? instructional video to understand your refinance options.

FREEandCLEAR Mortgage Instructional Video

What Mortgage Program is Right for Me? Instructional Video

Part of your decision depends on what direction you think mortgage rates are heading. If you think mortgage rates are going to increase in the future, you should select a fixed rate mortgage. If you think rates are going to go down, you may want to consider an adjustable rate mortgage or possibly an interest only mortgage. It is very challenging to predict how mortgage rates will change in the future, especially over the long term, so trying to take advantage of a potential shift in rates should not be your primary reason to select a mortgage program.

We recommend that you use the comparison chart below to determine the mortgage program that is right for your refinance. In addition to outlining how the programs work and summarizing their positives and negatives, the chart assesses the risk level for each program and addresses key loan features including mortgage rate, loan term and amortization. The chart also compares mortgage payments and identifies which program is best, depending on the interest rate environment. As illustrated by the chart, each program is suitable for a specific type of borrower with a unique risk profile and financial objectives. Review the chart below to learn about each type of mortgage so you can choose the program that best meets your refinance goals.

Mortgage Program Comparison

Fixed Rate Mortgage
Adjustable Rate Mortgage (ARM)
Interest Only Mortgage (IO ARM)
Summary
  • Interest rate and payment do not change over the life of the mortgage
  • Fixed interest rate and payment for first 3, 5, 7 or 10 years (fixed rate period)
  • Then interest rate and payment can change (adjustable rate period)
  • Pay only interest at fixed interest rate for first 3, 5, 7 or 10 years (interest only period)
  • Then pay both principal and interest plus interest rate and payment can change (adjustable rate period)
Pros
  • Certainty
  • Lower interest rate and payment during fixed rate period
  • Lower payment if rates go down
  • Lower payment during interest only period
  • Qualify for larger mortgage amount
Cons
  • Higher payment than ARM or Interest Only
  • Locked into interest rate if you cannot refinance
  • Uncertainty
  • Potential increase in interest rate and payment
  • Uncertainty
  • Payment increases when you start paying principal
  • Potential increase in interest rate
Risk Level
Lowest
Higher
Highest
Term
10-40 years 30 years most common
30 years
30 years
Amortizing Loan?
Yes
Yes
Only for part of term
Interest Rate
  • Depending on term, higher rate than ARM or interest only mortgage
  • Initial teaser rate lower than fixed rate mortgage
  • Initial teaser rate lower than fixed rate mortgage
Can interest rate increase?
No
Yes
Yes
Can interest rate decrease?
No
Yes
Yes
Initial Mortgage Payment
Highest
Lower
Lowest
Lowest possible monthly payment
Highest possible monthly payment
Going to own property for short period of time
Going to own property for entire term of mortgage
Think interest rates will go up significantly
Think interest rates will go down significantly
Best for low interest rate environment
Best for high interest rate environment

Contact lenders in the table below to learn about the programs they offer and to determine the refinance program that best meets your needs. Comparing lenders and loan terms enables you to find the mortgage program that is right for your refinance.

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Current Refinance Mortgage Rates in Ashburn, Virginia as of August 5, 2021
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Data provided by Brown Bag Marketing, Inc. Payments do not include amounts for taxes and insurance premiums. Read through our lender table disclaimer for more on rates and product details.

Sources

“Understand loan options.”  CFPB.  Consumer Financial Protection Bureau, 2017.  Web.

"Fixed Rate and Adjustable Rate Mortgages."  FDIC.  Federal Deposit Insurance Corporation, October 14 2016.  Web.

About the author
Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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