Is now the time to refinance your ARM?

Like many home buyers, you may have chosen an adjustable-rate mortgage because the introductory interest rate kept your monthly mortgage payments affordable during your early years of homeownership. But every adjustable-rate mortgage resets sooner or later, and when yours adjusts, you might be facing a substantially higher monthly payment.

The possibility that your payment might climb even higher may prompt you to consider refinancing your adjustable-rate mortgage with a different loan product. The choice to refinance isn’t easy, but there is no need to panic or overreact to a higher payment.

Factors to consider
The difference between the reset monthly payment on your existing mortgage and the amount you would pay on a new mortgage is the most obvious factor to consider, but shouldn’t be the only factor you keep in mind. Other considerations might include the caps and adjustment periods on your current mortgage, the outlook for higher (or lower) interest rates, the cost to you in time and money to obtain a new mortgage, and how much longer you expect to own your home.

The caps and adjustment periods on an adjustable-rate mortgage can protect you against substantially higher payments even if interest rates continue to rise. It’s difficult to predict interest rates, but you can educate yourself and pay attention to financial-market news, so you can make smarter decisions.

A new mortgage can cost thousands of dollars and take many hours to research, apply for and close. If you expect to sell your home within a few years, the benefits of a new mortgage might not justify the outlay of time and money. That’s especially true if you itemize your income tax deductions since a higher mortgage payment could be partially offset by a bigger break on your taxes. (Consult a tax advisor about your situation.)

New mortgage may be advantageous
If you obtained an adjustable-rate mortgage within the past few years, your payments might not be lower on a new fixed-rate mortgage today because interest rates now are likely higher than they were when your mortgage was originated.

Moreover, if you refinanced into a new loan that wouldn’t be paid off as quickly as your existing mortgage, you would have to make more payments into the future. For example, if you had made payments for five years on a 30-year ARM, you would have 25 years of payments left to make. But if you refinanced your ARM to avoid higher payments and you chose a 30-year term, you would be making payments for an additional five years. That means lower monthly payments might not be advantageous because you might need to make a lot more of them to pay off your new loan.

A new loan might offer other benefits, however. For instance, a fixed-rate mortgage would protect you against the possibility of even higher monthly payments in the future, an advantage that’s especially important if you plan to own your home for a long time.

Adjustable rate can be advantageous as well
You also might want to refinance one type of adjustable-rate loan into another type of adjustable-rate loan that would reduce, but not eliminate your exposure to higher interest rates. A lender can help you figure out which products might accomplish this objective.

An adjustable-rate mortgage may offer a key benefit that’s simply not a function of fixed-rate products: That is, your payments could be reset lower as well as higher as interest rates fluctuate over time. An adjustable rate is always riskier than a fixed rate, but if you can shoulder that risk, you may be rewarded with lower payments in the future.


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