Choosing Between Variable and Fixed Rate Loans for Home Refinancing

People with homes choose to go through the home refinancing process for many different reasons.  For instance, in areas where real estate is particularly hot, such as Phoenix or Atlanta, home refinancing may be done to take advantage of even small changes in the home lending rate.  On the other hand, other people refinance because they need to free up some extra cash or to go with a different bank with less odious customer service policies.  Regardless of the reason, everyone seeking home refinancing must choose between a variable or fixed-rate loan.  

Generally, when going with a fixed home refinancing loan, you can accept a slightly higher rate than the prime (or inter-bank) interest rate in exchange for a mortgage payment that doesn't change throughout the period of the loan.  This is a fantastic deal if you expect rates will rise in the next several years.  On the other hand, should you choose to take out a home refinancing loan during a period of historically high interst rates, those who choose a fixed rate loan will suffer unless the rate goes even higher.

Variable rate home refinancing loans are just that: the rate varies throughout the term of the loan according to the prime rate, plus a bit.  That bit depends upon the current state of the local housing market as well as the financial markets.  Home refinancing with a variable rate loan is a good choice when the rates are very high and you don't think they'll go higher.  However, if your assumption is incorrect, you may end up paying a great deal.  One should also avoid loans that eventually require balloon payments.

All home refinancing loans over the current federal maximum, as determined by Fannie May and Freddie Mac loan guarantees (currently at about $400,000), are charged at a somewhat higher rate.  This rate is sometimes mitigated by taking out two separate loans, though the tax rate will still be higher on property in places like with high values such as California, the East Coast and Washington DC Metropolitain area.  

Though sometimes used to extend the term of a loan with a high premium, home refinancing loans are also very often taken out to save
many thousands of dollars in interest payments over time.  During the 1990s, home refinancing was very commonplace.  As interest rates go down, home refinancing may become a very attractive option, locking in that low rate, regardless of inflation, for the duration of the home loan.

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