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Should I Choose Adjustable Refinance Mortgage Rates?

Mortgage refinance rates are rising and if you’re in the market for a new home loan the temptation for many loan officers is to push home loans with adjustable interest rates. Can you limit your risk and still save money refinancing with an adjustable rate mortgage? Here are several tips to help you make an informed decision on your next home loan despite rising mortgage refinance rates.

Mortgage Refinance Rates Are Rising Fast

Have you been procrastinating refinancing your home because you didn’t want to pay the closing costs? Over the past several weeks mortgage refinance rates have jumped nearly one percent across the board. Bank of America is currently showing 30-year fixed mortgage refinance rates at 4.625%, up from just under 4% two weeks ago.

This is a pretty dramatic increase considering two months ago you could have locked in three percent for 30-year fixed mortgage refinance rates.

Interest rates on 15-year fixed rate mortgages are also up, most lenders are quoting mid three percent, where a month ago you could lock 2.5%. The bond market is tanking which is bad news for mortgage refinance rates.

Things aren’t much better for adjustable mortgage refinance rates. Bank of America is quoting 3.375% for their 5/1 ARM, a popular choice compared to 4.625% for 30-year fixed.

What Are You Getting With A 5/1 ARM?

What does that 5/1 Adjustable Rate Mortgage mean? The first number designate the fixed rate period. If you locked Bank of America’s 3.375% today your mortgage payment would be fixed for the first five years.

The second number is the frequency that the interest rate and your payment amount resets after the fixed rate period. With the 5/1 ARM your payment resets every calendar year after the five year fixed period.

Many loan officers are pushing 5/1 ARMS right now because they’re not closing much with fixed rate mortgage loans at 4.675%.

Rising Mortgage Rates Means Higher Payments

If you lock a 5/1 ARM today you might be happy with the 3.357% interest rate for the first five years, but when your ARM starts resetting you could be in for payment shock.

The point here is the mortgage payment you could have gotten two months ago is significantly lower compared to the fixed mortgage refinance rates you’re locking today. This higher payment makes it much more difficult to break even recouping your closing costs to the point where mortgage refinancing may not make sense.

The Mortgage Refinance Rule of Thumb

Should I refinance my mortgage? Will your payment go down enough to recoup your out-of-pocket expenses? The refinance rule of thumb used to state that you shouldn’t refinance unless mortgage refinance rates were 2% lower than what you’re currently paying. This rule is too broad and leaves a lot of cash on the table.

You can use a simple mortgage calculator like this one to approximate your breakeven point. Enter the mortgage refinance rates you’re being quoted and your desired term-length to calculate your new payment amount. The difference between your old payment and the new one is your monthly savings.

Simple Mortgage Calculator

Loan Amount: Years: Interest Rate:

Annual Taxes: Annual Insurance:

Monthly Payment =

Divide the amount you’re paying at closing by the amount you’re saving each month and you’ve got the number of months it’s going to take you to recoup your out-of-pocket expenses. If you break even in a reasonable amount of time, (reasonable is subjective for everyone) then paying for a new home loan probably makes sense.

If you do any amount of mortgage refinance rate shopping you’re going to find that lenders have quietly switched to quoting 5/1 or 7/1 ARMs. Why are they doing this? These rates seem more attractive than 30-year fixed mortgage refinance rates meaning they close more home loans.

Who wants to refinance at 5%? Unless there’s no other choice mortgage refinance rates on 5/1 ARMs are an attractive alternative.

How to Shop Smartly for Your Next Home Loan

If you’re considering refinancing with a 5/1 or 7/1 ARM over current 30-year mortgage refinance rates, you should consider the risk of payment shock five or seven years down the road. Most financial analysts are predicting mortgage rates will continue to rise over the next ten years which could leave you with payment shock and no way of lowering your payment.

While locking in 30-year fixed mortgage refinance rates doesn’t sound as good as it did two months ago, knowing that your payment won’t skyrocket in five short years could give you a lot of peace of mind.

Is your loan officer quoting you a 5/1 or 7/1 ARM because the rates are better? If so you might want to question their motivation. Do they have your best interest at heart or are simply looking for a commission at a time when many loan officers aren’t closing refinance loans.

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