IS REFINANCING THE RIGHT MOVE FOR YOU?
If you have an Adjustable-Rate Mortgage, consider these factors about refinancing.
The federal reserve recently lowered interest rates, and if you have an Adjustable Rate Mortgage (ARM), it may be a good time to consider refinancing your home. There’s no one-size-fits-all answer to whether you should refinance, so here are a few of the main considerations.
How long does your introductory rate last?
Most ARMs have a fixed rate for the beginning of the mortgage. This is an introductory period (usually 3-10 years) when your rate will remain constant before it can be adjusted. If you have several years left in your introductory period, you can monitor interest rates for a while before making a decision. But if the intro rate is ending soon, it’s a great time to explore refinancing at a fixed rate.
How long are you staying?
If you plan to sell your home soon—especially if you’re still on a fixed introductory rate—there’s not much motivation to refinance. But if you’ll be at your home indefinitely, you should consider your refinancing options. You could eliminate the stress of not knowing what your future mortgage rate and payments will be.
What’s your loan balance?
The change in your mortgage payment will, of course, be determined in part by your remaining balance. If you owe $100,000-$200,000, a new interest rate may not greatly affect your monthly payment. On the other hand, if you owe $500,000, a change in interest rate could lead to a much higher payment.
Here are some pros and cons to refinancing an ARM to a fixed rate1:
Reduce interest rate risk. Refinancing could be an opportunity to lock in a low rate for the life of your mortgage and protect yourself against the risk that rates continue to rise.
Create a stable budget. A fixed-rate provides stability, allowing you to budget and plan for the future with more certainty.
Potentially lower your interest rate. People who secured their ARM seven or more years ago may have a higher base interest rate than what’s available in the marketplace today. Average mortgage rates ranged from 4.5% to 6.5% from 2008-2011, which means that you could potentially secure both a lower interest rate and a fixed payment by refinancing today.
Upfront costs. Refinancing comes with a number of upfront costs. Between origination fees, application fees, appraisal and inspection fees, and others, you may end up paying 2% to 6% in closing costs.
Those closing costs vary state to state and even lender to lender, so it pays to do your own research and shop around.
Interest rates might not increase by much. While refinancing from an ARM to a fixed-rate mortgage eliminates the risk that rising interest rates will lead to higher mortgage payments, there’s no guarantee that that risk will actually materialize. If rates don’t increase, or if they increase slowly, refinancing may simply leave you with a more expensive loan.
Increased monthly payment. When you refinance from an ARM to a fixed-rate mortgage, there’s a good chance that your monthly payment will increase, at least in the short term.
The previous items are just a few of the factors that should go into a decision about refinancing. Given both the upfront costs and the potential for a higher initial monthly payment, the length of time you plan on staying in the house has a big impact on whether refinancing is a good idea. It may take a few years for the savings from your refinance to materialize, and if you end up moving in the near future, you may not ever see those savings at all. Changes in income and your current credit score should also be considered, so be sure to weigh your options and make an educated decision.