If you’re considering taking out a new home loan to take advantage of today’s low refinance mortgage rates you might be tempted by that 5/1 Adjustable Rate boasting less than 3% from lenders like Amerisave. While it’s true that a 5/1 ARM could be a smart move if you can recoup your expenses in under five years, for many homeowners choosing this type of home loan leads to an expensive mistake. Here’s an article from TheTruthAboutMortgage.com with several reasons you’ll want to avoid that 5/1 ARM when shopping for the lowest refinance mortgage rates:
With mortgage rates as low as they are at the moment, you may be looking beyond fixed-rate options if you’re in the market to purchase a home or refinance your existing loan. After all, while 30-year fixed mortgage rates are hovering around 4%, some 5/1 adjustable-rate mortgages are in the 2% range. This can certainly push your monthly mortgage payment lower.
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Many homeowners don’t realize that the 5/1 ARM is only fixed for the first five years. After that, your home loan resets every year to the going mortgage rate, taking your monthly payment along for the ride. Considering that refinance mortgage rates are at historical lows and have nowhere to go but up, choosing a 5/1 ARM in this market is a risky proposition.
If you think you’ll just refinance again before the five-year fixed period is up you should know that these hybrid Adjustable Rate Mortgages carry hefty prepayment penalties making it impossible to recoup your out-of-pocket expenses in less than five years. This makes mortgage refinancing again a losing proposition. Because interest rates are so low it makes sense for most homeowners to lock a fixed-rate mortgage and try to recoup any out-of-pocket expenses from closing as quickly as possible. The faster you break even recouping expenses like the loan origination fee the faster you’ll benefit from having a lower payment amount.
You can learn more about paying less at closing by avoiding lender junk fees and 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.
