Interest rates can affect what kind of mortgage you get and when it's a good idea to switch. Here are a few things that can change when interest rates change:
How to Choose a Mortgage
When interest rates are going up, a fixed-rate mortgage is usually a good choice because it locks in the current rate and protects you from the higher rates to come. When rates go down, an adjustable-rate mortgage (ARM) becomes more appealing because its interest rate changes periodically (usually every one, three, or five years), letting you take advantage of the new, lower rates.
Even when rates are going up, some people choose an ARM. This is because the interest rate on an ARM is much lower than that on a 30-year fixed-rate mortgage—by as much as two percentage points less. That means you'll pay less until the interest rate on your mortgage goes up by two percentage points. You'll pay more than a fixed rate after that.
Hybrid ARMs have a fixed rate for a certain amount of time, usually between three and ten years, and then the rate changes. (For example, a 5/1 ARM has a fixed rate for the first five years. After that, the rate changes every year.) Hybrid ARMs are a good choice if rates are likely to go up in the short term but then level off or go down. But it can be hard to tell what these long-term trends will be.
Refinancing
If the way interest rates have been going changes, it might be a good idea to switch to a different type of mortgage. When rates go down, you can save money by switching from a fixed-rate mortgage to one with an adjustable-rate, so you can take advantage of the lower rates. If it looks like interest rates will keep going up, switching from an adjustable-rate mortgage to a fixed-rate mortgage can lock in a lower rate and keep your payments from going up. You should, however, make sure that the costs of closing don't cancel out the benefits of refinancing.
