Are you searching for the lowest refinance rates for your next home loan? Adjustable Rate Mortgages are becoming a good option with little risk from today’s best mortgage lenders. Here are some of the pros and cons of refinancing with an Adjustable Rate Mortgage in today’s market.
Adjustable Rate Mortgage Demystified
If you’re unfamiliar with Adjustable Rate Mortgages here’s the basics you’ll need to know. Abbreviated as ARM, adjustable Rate mortgage loans have an interest rate that changes at regular intervals. When the lender changes your interest rate, also called resetting your ARM, your payment amount will change based on the new interest rate.
How often your ARM resets depends on the type of adjustable rate mortgage you choose. These mortgage loans are designated by two numbers. The first number represents the fixed period of the adjustable rate mortgage and the second number is how often the home loan resets. Take a 7/1 Adjustable Rate Mortgage for example, the interest rate is fixed for the first 7 years and resets every 12 months (1 year) after the fixed rate period.
Who Should Refinance With An Adjustable Rate Mortgage?
You’ll find that Interest rates on an Adjustable Rate Mortgages are typically lower than 15-year fixed mortgage rates. Considering that the average homeowner refinances every 4-5 years a 5/1 or 7/1 Adjustable Rate Mortgage could be an excellent choice if you need a short-term mortgage as a bridge before selling or refinancing down the road. Taking advantage of the lower interest rates offered by and adjustable rate mortgage will get you a lower, fixed payment for five to seven years.
What Are The Risks of Adjustable Rate Mortgage Loans?
The main risk when refinancing with an ARM is that interest rates will go up when the lender resets and take your payment along for the ride. Many Adjustable Rate Mortgages are tied to the LIBOR index which is a European index susceptible to all the economic turmoil going on in the European Union. If you have a low tolerance for financial risk your best bet for mortgage refinancing might be a 30-year fixed rate mortgage.
Another problem homeowners run into with Adjustable Rate Mortgages can be the lender’s prepayment penalty. If your Adjustable Rate Mortgage has a prepayment penalty in the loan contract and you sell or refinance before the penalty ends you could be facing a hefty fee at the end of your ARM’s fixed rate period.
Should You Choose an ARM for Your Next Home Loan?
The answer to this question depends on your needs and goals for your home loan. If you need the lowest possible mortgage payment choosing a 5/1 ARM will get you the lowest refinance rates. Sticking with a 30-year term length with your Adjustable Rate Mortgage will ensure you get the lowest monthly payment.
If your goal is to build equity in your home and you’re ok with the risk a 15-year Adjustable Rate Mortgage will give you the best of both worlds; lower payments than fixed-rate mortgages while building equity at an accelerated rate over a 30-year mortgage.
Other Factors to Consider than Just the Lowest Refinance Rates
One of the most common mistakes people make is focusing on getting the lowest refinance rates at the expense of fees. The more you pay when refinancing your home at closing the less benefit you’re getting from having low refinance rates. If you’re not able to break even recouping your out-of-pocket expenses paid at closing you’re going to be losing money no matter how low your interest rate.
Some of the most commonly overpaid fees include the broker’s loan origination fee or paying for discount points. These fees are not only negotiable by vary widely from one mortgage lender to the next.
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