Should I Refinance My Adjustable Rate Mortgage?
By RJ Baxter
Millions of Americans nationwide currently have an adjustable rate mortgage (ARM) on their home that is set to adjust in the next couple years. Many are wondering what they should do. Should they take advantage of historically low rates that are available right now, or wait it out and see where rates are at the time their mortgage is set to adjust?
So should you refinance your adjustable mortgage into a fixed rate right now? Mortgage rates are at historical lows as of February 2007, so now is a great time to consider refinancing into a fixed rate mortgage.
The decision of whether or not to refinance right now should be based on several things:
1. Where are mortgage rates headed? No one has a crystal ball, but rates were extremely low at the time this article was written (Feb 2007). It is worth talking to a mortgage professional about your options right now regardless of the answers to the rest of these questions. A skilled mortgage professional will keep you abreast of market conditions and mortgage rate trends and advise you as to the best time to lock in a rate.
2. How soon will my adjustable mortgage adjust? If you have more than two years left on your current fixed portion of your ARM, then it is worth considering "floating" until you are closer to the adjustable period of your mortgage. Most likely, you locked in at a very low rate compared to current market conditions, and it is probably worth waiting it out. Many things can happen in life over the course of several years- you may decide to move, or may have another reason to refinance anyway before the ARM adjusts.
If you are within two years of your ARM adjusting, I would recommend talking to a mortgage professional about your refinancing options.
3. What is my current rate on the adjustable? If your current rate is less than 5%, even if you are within one year of your mortgage adjusting, it is most likely worth waiting it out until your ARM starts to adjust.
4. How long do I plan to stay in my home? If there is a good chance you might move before your ARM adjusts or even within the first year of the adjustable period of your ARM, it is probably best to wait it out rather than incur the costs of refinancing.
5. Do I have a prepayment penalty? Prepayment penalties can be costly. If you have a prepayment penalty, consider waiting it out.
6. Do I have plans for home improvements or other financing needs in the near future that might require a cash out refinance? If you plan to remodel your home or put on an addition, you may need financing in the future. You could consider refinancing your ARM as part of that loan when the time comes.
What is an Adjustable Rate Mortgage (ARM)?
Adjustable Rate Mortgages are mortgages with a fluctuating interest rate that is calculated on a specified schedule. Most ARMs have a fixed period at the beginning of the term during which the rate does not change. Most ARMs also are on a 30 year term. The advantage of an ARM is that it offers a lower interest rate and payment than a 30 year fixed. This loan is designed mainly for a family who plans to move before the ARM starts to adjust.
ARM interest rates are calculated based on an economic index such as the LIBOR or US Treasury index. Once you get to the adjustable period of the ARM, the lender calculates your rate by adding the current index value to a "margin" or fixed portion of your loan. The margin never changes during the entire 30 year term. There are "caps" which will protect you to a certain extent, the purpose of which are to prevent the interest rate from fluctuating too much, too fast.
About the Author
RJ Baxter has been a mortgage consultant for over five years. RJ utilizes his teaching background by educating consumers and advocating ethical business practices in the mortgage industry. RJ has received many awards for excellence and loan volume and has consistently ranked in the top ten among his colleagues. For more articles like this, or to read more about RJ or Franklin Bank, please visit www.rjbaxter.com.
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