Adjustable Rate Mortgage Loan Review
Are Adjustable Rate Mortgage Loans Worth The Risk?
Should you choose an adjustable interest rate for your next home loan? It’s true Adjustable Rate Mortgage (ARM) loans come with lower interest rates than their fixed-rate counterparts; however, there is more risk when rates go up and take your payments for a roller coaster ride. Here’s a review of several common types of ARM home loans from today’s best mortgage companies like Amerisave and Quicken Mortgage.
Rating by Robert Regehr: stars
If you’re considering mortgage refinancing with an Adjustable Rate Mortgage, you might wonder if the risk associated with these home loans is worthwhile. Sure, Adjustable Rate Mortgages (ARM) sport lower refinance mortgage rates than their fixed rate counterparts; however, that rate will change over time and take your payment along for the ride. Here is a review of several common Adjustable Rate Mortgage Loans to help you decide if the higher risk is right for you.
To ARM or Not to ARM
In the simplest definition, an Adjustable Rate Mortgage is a home loan with a variable interest rate that changes over time. These loans are typically fixed for an introductory period of 5 to 7 years and then reset every year after that on the anniversary date. You’ll see this designated as 5/1 or 7/1 ARM. The 5 and 7 indicate the fixed period and the 1 is the timeframe for the reset. (1 year in this case)
Many homeowners look at the fixed period thinking they’ll just refinance before the loan resets. If this worked it would be great because you’d have 5-7 years of lower mortgage payments than you’d get with a traditional 30-year fixed rate home loan. The problem is that if you thought of this, your lender has too. Adjustable Rate Mortgages typically have steep prepayment penalties if you refinance or sell your home making this mortgage strategy a losing proposition.
Variable Rates Are at Historical Lows
Should you refinance your existing home loan with an Adjustable Rate Mortgage? Interest rates on ARMs are at a 60 year low and quite a bit lower than their fixed-rate counterparts. It’s now cheaper to refinance your existing ARM than let the lender reset the home loan; assuming your prepayment penalty has expired.
Are Adjustable Rate mortgages worth the risk? Keep in mind once your loan starts resetting your payment will change along with the new interest rate. Can you afford to pay a hundred or more dollars per month each year if rates go up? Homeowners with fixed-rate mortgages have a payment that will not change over the term of their loan. The down side of a fixed-rate home loan is higher refinance rates and a higher monthly payment.
Remember there’s more to your home loan than just getting low rates. If you choose a fixed-rate or Adjustable Rate mortgage the fees you pay make or break your home loan, especially when mortgage refinancing. When you refinance with one of today’s top lenders like Amerisave or Quicken Mortgage you need to break even recouping your closing costs before you’ll benefit from a lower payment. The more you pay, including lender junk fees, the longer it’s going to take you to breakeven and the less benefit you’re getting from that lower interest rate.
Not to mention if you’re a serial mortgage refinancer or you sell your home before breaking even on your out-of-pocket expenses you’re losing money no matter how low your interest rate. You can learn more about getting today’s lowest refinance rates without paying unnecessary 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.
