Refinancing to a Fixed-Rate

If you have an adjustable rate mortgage, it's important for you to evaluate that rate periodically. There are several factors to consider in refinancing from an ARM to a fixed rate mortgage.

First, how long will you be in the home?  If you have an adjustable rate mortgage and you think you'll move in two years or less, you should probably stay in the ARM.  If you'll stay longer than two years, you'll want to look at your home loan situation a different way.

A few important things to consider:

  • The adjustment period or term of your ARM
  • The indexed interest rate
  • The margin on your ARM

Now, once you have all of these important items figured out, evaluate the situation to decide if it's time to convert to the FRM.  Let's assume you have an ARM at 4.5% interest on a $100,000 loan.  You have a monthly mortgage payment of $506.  Also assume that his is based on an indexed rate of 2.5 with a margin of 2%.

If this was a three-year ARM, and the adjustment period is about to arrive, it's important to check the rate on your one-year treasury index (on which your ARM is most likely based), knowing that your margin doesn't change. 

Let's assume your index has increased in each of the last three years by a quarter of a percent.  It's now 3.25%, which means your rate will increase to 5.25% and your mortgage payment will increase to $552 - a hefty forty-six dollars more each month and over $500 each year. 

You may say that this is still better than the payment you'll get with a 30-year fixed rate mortgage, and you may be right.  What you'll want to consider, though, is the dangerous trend of your indexed rate.  Most ARMs change yearly, after the initial adjustment arrives, so you'll likely have an increase again the following year.  Plus, many ARM indices are adjusting at much higher intervals than .25%.

Here's where the fixed rate mortgage might be the answer.  If you'll stay in your home for a few more years, think about refinancing to the fixed rate, so you no longer have to be concerned with large increases in your mortgage payment.

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