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Mortgage loans: Time to refinance your adjustable rate mortgage?

[Nov 2, 2010.]


Today's low mortgage rates are providing good incentive for refinancing your adjustable-rate mortgage (ARM) loan to a fixed-rate mortgage (FRM) loan. Lower mortgage rates are making FRM loans more affordable for homeowners who originally took out ARM loans due to financial constraints. If your ARM is about to reset, it's time to consider mortgage refinance options. In a blog for HSH Associates, Tim Manni observes that deciding when or if to refinance depends on individual circumstances in addition to current mortgage rates.

Match your mortgage loan to your financial style

Your tolerance for risk and variation in your financial dealings will help you decide which type of mortgage loans work best for you:

  • Stable monthly payments: Fixed-rate loans are fully amortized and offer stable monthly payments throughout the life of the loan. (If your mortgage payment includes taxes and insurance, it may vary according to changes in tax rates or insurance premiums.)
  • No exotic mortgage features: Some adjustable-rate mortgage loans may include features such as deferred interest and negative amortization. These features can increase your mortgage amount rather than decreasing it. Fixed-rate mortgage loan payments don't increase over time. If you have an ARM that's going to reset soon, review your mortgage documents for determining how your mortgage loan works. Consult a financial advisor for help with interpreting mortgage documents if needed.

Refinancing your mortgage: Shorter term saves money

Refinancing from an ARM to a FRM can yield even more benefits if you can refinance from a 30-year loan to a 15-year loan. If you can afford the higher payments, you could save up to tens of thousands of dollars in interest by paying off your mortgage sooner. Using online mortgage calculator tools can help you estimate the benefits of a shorter mortgage repayment term compared to your existing mortgage loan.

Another important question when considering refinancing is how long you plan to stay in your home. Refinancing costs approximately 2 to 3 percent of your new mortgage amount; you'll want to stay in your home long enough to break even on the refinance costs. If you're seeking additional cash but may be selling your home soon, a home equity loan may provide the cash you need without the high up-front costs associated with refinancing. Again, an online mortgage calculator can help determine how long it will take you to break even.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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