On a similar note...
On a similar note...
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Adjustable-rate mortgages, or ARMs, are attractive because they offer low, fixed introductory rates. But as the word "adjustable" implies, those rates don’t last forever.
Should you refinance an ARM to a fixed-rate mortgage? Ask yourself the following questions.
If you answer "yes" to one or more, you might be ready for an ARM refinance.
» MORE: Adjustable-rate mortgage basics
Is my ARM rate resetting soon?
An ARM begins with a low interest rate that’s fixed for a predetermined amount of time. After the fixed period ends, the interest rate periodically adjusts to the current ARM rate, as set by your lender. How often that happens can be found in the loan’s name.
For example, with a 5/1 ARM, your rate will remain locked for the first five years, then reset every year after that. If the ARM rate is higher at the annual reset, your mortgage payment could go up, and if it’s lower, your payment could go down.
Nerd tip: Your lender is required to inform you of your new payment amount up to eight months prior to the first time your ARM rate resets. Use that time to weigh your options.
You could do nothing when your ARM rate resets. If you decide to do that, your monthly payment may fluctuate — potentially drastically — in the future. If the new payment won’t fit your budget, consider an ARM refinance.
You can refinance into another ARM or a fixed-rate mortgage. While you may be able to lock in a low rate with another ARM, refinancing to a fixed-rate mortgage will allow you to avoid further rate adjustments in the future. Just make sure to choose the right loan length.
Steve Garrett, a home mortgage consultant at Wells Fargo, says the biggest mistake consumers make when refinancing an ARM to a fixed-rate mortgage is starting the clock over with a 30-year fixed loan.
If you’ve been paying an ARM for five years, it makes more sense to give yourself credit for those five years and refinance to a fixed-rate mortgage with a term of 25 years or less, he says.
Do I want more payment stability?
While ARMs sometimes have caps that limit how much your mortgage rate and payment can change with each adjustment, you may not be comfortable with the uncertainty.
An ARM refinance to a fixed-rate mortgage can make it easier to budget for your future. Although fixed-rate loans tend to have higher interest rates than adjustable-rate loans do in the introductory period, refinancing to a fixed rate will give you the security of a more predictable monthly payment.
Do I plan to stay in this house for a while?
If you plan to live in your current home for an extended period of time, Garrett says that refinancing an ARM to a fixed-rate mortgage is often a good idea. However, he stresses that refinancing isn't the right move for everyone, especially if you plan to live in your home for only a few years.
Refinance closing costs can add up to 5% of your outstanding principal. These costs may include discount points, origination fees and prepayment penalties, and can certainly add up.
Garrett suggests making sure that you'll recoup any closing costs within 36 months of refinancing your ARM to a fixed-rate mortgage.
Not sure if an ARM refinance makes sense for you? Crunch the numbers with our refinancing calculator.