Are you currently paying down an adjustable rate mortgage and eyeing today's low interest rates? Yet the lowest of these are not attached to fixed-rate loans; they are, like your current mortgage, adjustable. There are circumstances in which paying for a new ARM refinance makes sense and can save you thousands of dollars. Here are several tips to consider if you're in the market for a fixed or adjustable rate refinance.
Advantages of an ARM Refinance
Gone are the days of living in just one home for 20 or more years. According to the National Association of Homebuilders (NAHB), there are a number of different reasons homeowners are moving around more than ever, including trading up for more expensive homes or relocating for new jobs. And the National Association of Realtors (NAR) says that average home buyers keep their houses about ten years. Younger buyers and first-timers generally sell sooner than "move-up" buyers. In addition, almost 40 percent of home buyers surveyed did not know how long they'd keep their homes before selling.
If you don't plan on living in your home for 30 years, why would you choose a 30-year fixed rate mortgage? ARM loan introductory rates are fixed for one to ten years and their rates range between .5 and 1.5 percent lower than 30-year fixed mortgages. They can offer significant advantages for this new generation of transient homeowners. Refinancing your old ARM loan with a new one can let you lock in today's lowest rates for years.
Pitfalls of ARM Refinance Loans
Before choosing to refinance to an ARM loan, have a reasonably clear idea of your expected timeframe for selling and moving. You'll also want to compare loans and know what could happen to your payments if you overstay your expected tenure. For example, a 5/1 hybrid ARM might offer a 2.5 percent rate today, but what happens if you keep your home for seven years? A typical 5/1 hybrid can increase by up to three percent the first year and then a max of two percent per year after that until it hits its lifetime cap. So you might be looking at a 5.5 percent rate in Year Six, and a 7.5 percent loan in Year Seven.
Serial Refinancing Can Feel Like Renting
One of the main disadvantages repeated refinancing is that every time you take a new mortgage, you restart the clock on your home repayment. If you have a 5/1 ARM with a 30-year term and refinance it in five years to another 5/1 ARM with a new 30-year term, you're still 30-years away from becoming mortgage-free. You can offset this problem, however, by refinancing to a 15-year loan or by making extra principal payments to retire your loan on schedule.
Play around with LendingTree's Refinance Breakeven Calculator to see how your refinance mortgage choices can affect your payment, interest rate, overall savings, home equity and repayment schedule.
Next, compare rates and programs with LendingTree's current mortgage rates to see real-time offers for people with a profile similar to yours. A 30-year home loan might be your best option. But you won't know for sure until you explore the possibilities of adjustable mortgages today.