Help.. I am confused about mortgages. I am refinancing my home.. I currently have a loan that could go negative amorization?. and I want to change that.. I have been told to go with a 30 year fixed because interest rates are at an all time low... but my mortgage brokers says that it smarter to go with a five year interest only fixed rate.. (I can pay principal as I please, or put the mortgage savings in a retirement account)... I don't know which advice to follow...

A 30-year fixed is the safest type of loan. Your interest rate is fixed for the entire 30 years and your monthly payment will not change. Adjustable rates are riskier. With a 5-year adjustable the interest rate is fixed for 5 years but after the 5 year period is over the rate can increase (or decrease) every year. You could start in 2000 with an interest rate of 5% and by 2010 the interest rate could be 11%, depending on market conditions. That could vastly increase the amount of your monthly payment. Adjustable rate loans are great for people who know that they will be selling their home within a short time. If you plan on staying in your home for more than 5 years then the 30-year fixed rate would probably be a lot better for you.

First the first few years of a mortgage will be interest and almost no principal, so basically there is no "savings" to put into a bank account normally.

And of course your mortgage broker want you to do that, so that in 5 years they can make money getting you another mortgage.

It is doubtful that interest rates will be that much lower in 5 years, and if they are, you can still re-finance with the fixed mortgage.

By having one that is not fixed, you are merely saying you will have to pay the higher interest if rates go back up, perhaps double of what they are today.

And if they do get a lot lower, you can always refinance with a fixed.

Next you never want a payment that is more than 1/4 of your take home pay, a higher payment only means you are buying too much house.

Also look at a 15 year mortgage, cutting the time in half and the payment is far from double, saves you tons of money.

Shorter term mortgage lengths allow for a lower interest rate.. The 5 year arm rate is going to be better than the 30 year fixed.. So the big question is, do you plan on moving within the next five years? If you do, go for the 5 year and save on the rate.. If you plan on staying in the home more than 5 years, get the 30 yr fixed...
You can also get the 30 year fixed w/ interest only option if your interested but you will not be paying any principal, obviously... :)

as mentioned, you need to consider the time you will live in your home. If you are intending to move in 3-4 years the arm might be a fine choice. If you are happy where you are and intend to stay put, the longer term fixed rate isn't a bad idea.

the issue with the arm is what if the market turns tomorrow? You need to be thinking about not only this house but your next. If you commit to an arm and then decide to stay for more than 5 years, you are NOT guaranteed that you will be able to get a rate anywhere near today's. If rates really jump or the housing market in your area drops out you might not find as many buyers willing or able to buy at your price.

also, refinancing in an inflated market with an excessively favorable appraisal could really hurt you if the market turns. If you are simply refinancing to get some cash out tax free OK. Your prerogative.

if you are refinancing though in a market that is bloated you need to be sure that your appraised value, and therefore loan, will hold reasonably true if the market turns. Otherwise you could end up with a loan that is bigger than the house's "true" value. I know, I know... what the market will bear, blah blah blah.

so generally speaking you need to consider whether this is a house you'll likely live in more or less than 5 years. Short = arm, with the knowledge that you could get hit if you decide to refinance in 5 but the rates have really jumped. Longer term fixed if you intend to stay or the security of a fixed mortgage gives you some peace of mind.

a question for you - where are you located? If you look at the link below it lists cities and the jump in sales over the last year. Also a link for the previous year. If you are in a market that had huge jumps in sales prices it might reflect well thought community planning and/or solid economic development coming to fruition. If you live in an area where people are getting a 30% gain for no other reason than the market is hot, again just be sure your appraisal is realistic.

http://money.cnn.com/2006/02/14/real...quarter_sales/

didn't mean to complicate the simple question of arm vs fixed... but when you mentioned the IO option it worried me. They are being exploited in bubble markets and the people misusing them are going to get creamed if the markets turn... not to mention the banks who lended irresponsibly. If you're in an emerging market whose solid gains are backed by economic reason, well good for you. People can make a lot of money being in the right town at the right time.

hmmm. Guess I'm done ranting for now.

You could also consider a 15 yr fixed.

Interest rates are a half percentage lower than on a 30yr