If you decided to take advantage of the lower interest rate typically offered on an adjustable-rate mortgage (ARM) when you purchased or refinanced your home, it is a good idea to periodically evaluate whether or not it would be beneficial to refinance into a fixed-rate loan. While everyone’s situation is different, there are generally three situations that may lead you to abandon your ARM for fixed rate.
A Rising Interest Rate Environment
Adjustable rates are very attractive when rates are higher and expected to decrease in the future since it means your rate is likely to decrease over time. Just the opposite is true when interest rates are increasing, there is considerable risk that your interest rate will go up over time. Even if your initial fixed period is a few years from expiring, meaning you are a few years from your first adjustment, it is worth considering the long-term impact; particularly if rates are expected to continue to climb for several years. It may be well worth it to lock-in a long-term rate now rather than ride out your fixed period and end up with a higher rate later.
End of the Initial Fixed Period
Most ARM loans do not begin adjusting immediately, they have initial fixed-rate periods that last, most commonly, for 3, 5, 7, or even 10 years. Depending on where current rates and indices (ARM rates are tied to a specific index, such as the LIBOR index) are and the outlook for the future, it may make sense to refinance when the initial fixed period is up. Keep in mind that this could include refinancing into another fixed-period ARM if you determine that is the best option for you.
Change of Plans
A very common motivator for getting an ARM in the first place is to avoid paying for 30 years of interest rate security if you have a reasonable expectation that you will be selling the home (or otherwise paying off the mortgage) in a much shorter amount of time. Of course, plans can always change. If you determine that you are going to be in the home longer than your fixed period provides for, a reevaluation of the benefits of your current ARM is in order.
The common theme running through all of these is the outlook for the future, both in terms of interest rates and in your future plans. ARMs can be great financial tools when used well or can be harmful if used for the wrong reasons or if they are put on autopilot and ignored. If you currently have an adjustable-rate mortgage, I can help you put together the information you need to evaluate your options and make an informed decision that benefits your financial future.