Rumors of mortgage rate increases have many people concerned about their adjustable rate mortgages (ARM), and rightly so. An interest rate increase could lead to a subsequent increase in the amount some homeowners pay monthly on their mortgage.
Rising interest rates postpones the date that you will own your home. For many this is the least of worries. What causes the most alarm about the increase in interest rates is the resulting increase in monthly mortgage payments. The increase in monthly expenditures puts a squeeze on many people’s budgets; especially those people who were just making ends meet prior to the increase.
There is at least one hope of relief from the increase in mortgage payments. Refinancing your adjustable-rate mortgage for one with a fixed rate can provide you with a monthly payment lower monthly payment than payments to the varying interest rate of an ARM.
Whether or not you refinance will depend, in part, on the length of time you plan to reside in your current home. If you will only be in your home for the next five years, then it is not worth it to refinance your ARM. The cost of refinancing your home nullifies any benefit you receive from a decrease in your monthly mortgage payment. However, if you plan to keep your home for more than five years, then refinancing is certainly worth considering.
When you are considering refinancing your ARM for a fixed rate mortgage (FRM), there are some factors you should take into account. You need to know the current interest rates for FRM’s. Compare this interest rate to that of your ARM. Is it higher or lower? If it is lower and you can afford the cost of refinancing, you should certainly refinance.
However, if the FRM interest rate is higher than that of your current ARM, which is usually is, there are additional factors that should be taken into consideration. While there are techniques for estimating, there is no sure way of knowing what ARM interest rates are going to do in the future. They may go up and stay up, they may go down and stay down, or they may fluctuate for the remainder of your loan. Since markets tend to correct themselves over time, it may be worth it to wait out the increase, if you can afford it. However, if interest rates are going so high that you begin to feel the pinch in your pockets, refinancing is certainly worth considering given the FRM is within a few percentage points of the ARM.
There may be an initial increase in payment if the ARM rate is lower than the fixed rate. However, you will have peace of mind having a set mortgage payment for the life of your loan.