Common advice tells borrowers they should refinance their
adjustable rate mortgage (ARM) to a fixed-rate mortgage.
However, there are times when it makes better financial sense to
do the reverse. The prime reason is that an ARM provides lower
rates.
Low Interest Rates Of An ARM
An ARM's primary benefit is a lower interest rate. Typically a
couple of points lower than a fixed-rate mortgage, an ARM can
save you thousands. The downside is that an ARM's rates can rise.
However, if you are planning to move in a couple of years or
expect rates to drop, then an ARM may be worth the risk. If you
are worried about rising rates, you can select an ARM with rate
and payment caps. There are also ARMs that convert to a
fixed-rate after a preset number of years.
Smaller Payments With An ARM
An ARM can also give you smaller payments temporarily through
lower rates. Even though these payments may rise, you can expect
your wages to increase with the rate of inflation as well.
If you need some temporary breathing room in your budget, you
may find that an ARM can help. There is always risk with this
option, especially if you are planning on a promotion or career
change in the future.
Considering The Costs
While lower interest rates can save you money, the loan costs
can eat into your financial savings. Loan fees can easily add up
to $3000, in addition to points. The general rule of thumb is
that after three years, you will be saving money on the
refinance deal.
There are times when you can see a savings earlier, especially
if rates are more than two percent lower or you find a low cost
refinancing deal.
To really know if you will save by refinancing, you need to
research rates. Ask for quotes from several lending
institutions. Then figure out your interest payments with the
help of a mortgage calculator. Compare these with your current
interest charges, and you will know what type of savings to
expect. Subtract the loan fees and points, and you will find if
you can come out ahead in the end.
About the author:
See my recommended
Home Mortgage
Refinance Lenders for the lowest rates online. Carrie Reeder
is the owner of ABC Loan Guide, which offers help finding
low rate home mortgage
loans.
