If you’re considering mortgage refinancing with one of today’s best mortgage companies like USAA Mortgage Rates or Amerisave, you might consider an ARM as a low-cost option. Adjustable Rate Mortgage loans earned a bad reputation when the housing bubble burst as a risky home loan. Today, refinance mortgage rates are near sixty-year lows so it’s actually cheaper to refinance your ARM than to allow the lender to reset the loan. Here are several of the pros and cons of Adjustable Rate Mortgage refinancing to help you decide if this type of home loan is right for you.
Fixed Rate Mortgage Loans Increasingly Popular
Traditional fixed rate home loans have become more popular largely because rates are so low and they offer the stability of a fixed payment amount. For some homeowner, Adjustable Rate Mortgage loans offer lower refinance rates with minimal risk.
Adjustable Rate Mortgage rates are lower than their fixed rate counterparts because the rate is only locked for a short period of time. The fixed period of most arms usually lasts five or seven years, designated by lenders as 5/1 or 7/1. The second number indicates the time interval between resets after the initial fixed period of 5 or 7 years. Once the fixed period has expired the lender resets your interest rate and payment based on current market rates.
If you’re only planning for keeping your home for a short period of time, say five to seven years, Adjustable Rate Mortgages can save you money with much lower rates. One pitfall of using Adjustable Rate Mortgages in this manner you might encounter is the prepayment penalty. Lenders frequently charge this penalty if you sell or refinance again within a certain period of time. If you’re forced to pay a prepayment penalty to get out of your existing home loan it could negate any benefit you’re getting from the lower interest rate.
Pay Down Your Mortgage Balance More Quickly
One mortgage refinancing strategy for building equity in your home at an accelerated rate involves refinancing with an adjustable rate mortgage and continuing to make your old payment amount. The difference between your new and old payment will be applied directly to the loan’s principal balance, building equity in your home at an accelerated rate.
Shortening your term length to 15 or 20 years will also build home equity at an accelerated rate while greatly reducing your finance charges. The disadvantage of a shorter term-length if you’re used to paying on a 30-year home loan is a higher payment amount. Remember term-length is the amount of time you have to repay the mortgage and along with the interest rate sets your payment amount.
Risks of Adjustable Rate Mortgage Refinancing
Once your fixed-rate period expires the lender will being adjusting your interest rate on a regular time interval, usually every twelve months. The risk is that if interest rates tied to the LIBOR (a European index) go up, your monthly payment will go up also. If you only plan on keeping your mortgage for the fixed rate period you want to be sure you’ll be in a position to refinance or sell your home without incurring a penalty. Used sensibly, Adjustable Rate Mortgage loans can be an effective money-saver in troubled economic times.
You can learn more about taking advantage of historically low refinance mortgage rates without paying lender junk fees or markup by checking out my free Underground Mortgage Videos.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
