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Should you consider refinancing into an ARM?

[Jun 28, 2011.]


Today's most popular ARMs are hybrid ARMs, with a fixed-rate period followed by an adjustable-rate period. While financing with an ARM isn't right for everyone, some homeowners considering mortgage refinancing could substantially reduce their monthly payments and the amount of interest they are paying on their mortgage with an ARM.

Lowest mortgage rates on ARMs

The gap between interest rates on a fixed-rate loan and an ARM varies, as do the mortgage rates for various ARMs, but generally ARMs can be as much as one point or more lower than a 30-year fixed-rate loan. For example, HSH.com says that the average rate for a 30-year fixed-rate loan for the week ending June 10, 2011 was 4.75 percent with 0.29 points, while the average rate for a 3/1 ARM was 3.29 percent with 0.14 points.

On a $200,000 mortgage, the principal and interest payment would be $1,043 at 4.75 percent and $875 at 3.29 percent.

Mortgage refinancing with an ARM

Despite the availability of a reduced interest rate, only about six percent of all mortgage loan applications in June 2011 are for ARMs, according to the Mortgage Bankers Association. Most homebuyers or homeowners who are refinancing choose to lock in a fixed-rate loan, but the following circumstances could make an ARM a better choice:

  • You are sure you will sell before the mortgage rate adjusts

  • You are sure you can pay off the loan in full before the rate adjusts

  • You are certain to have additional income by the time the loan adjusts and will be able to afford possibly higher payments

  • You are certain to have fewer expenses (such as the elimination of college tuition payments or the sale of another home with a mortgage balance) by the time the loan adjusts

Understanding your ARM

If you think an ARM might be right for you, you must understand the key elements of the loan, including the length of time the rate will be fixed, the index the rate is tied to and the margins and caps. The margins and caps refer to the limits on how much the mortgage rate can increase at the first loan reset, how much they can increase for each following reset and the maximum allowable interest rate increase for the life of the loan.

Understanding your loan means you can estimate the worse-case scenario in terms of the monthly payments for principal and interest and determine how you would handle those payments. Once you have an answer to that question, you can decide if an ARM is right for you.

For refinancing options in your area, go here.


About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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