Should I Refinance My ARM to
a Fixed Rate Mortgage?
Should I refinance my ARM to a fixed rate - There are benefits and negatives to both a fixed rate and an ARM mortgage, but for the borrower who is thinking about refinancing their ARM into a fixed rate, there are many things to consider. By Refinancing your ARM to a fixed-rate mortgage you will avoid the payment increase when your ARM interest rate begins to adjust. You will also lock into a more stable payment for the term of your mortgage.
If you are in a situation in which you MUST refinance, pay close attention to what is going on in the market. Make sure you are dealing with a savvy and honest loan officer or Mortgage Broker. Sometimes the yield curve becomes inverted, and you can actually refinance into a 30 year fixed mortgage, at a lower or equal rate than a 3 or 5 year ARM!
You need to find what your break even point is for your current loan. Have you already broken even? If not how much more will it cost you to continue in your current loan? Have an honest discussion with a broker to decide what the best course of action is.
In an economic climate where short term rates and long term rates are about the same, it may be better to refinance adjustable rate mortgages into fixed rate loans. Home buyers are willing to share the risks of an adjustable rate mortgage when the adjustable rate is significantly lower than fixed rate mortgages. If such advantage no longer exists, fixed rate mortgage is often a preferred choice.
Many people take adjustable rate mortgages because credit challenges prevented them from having a low fixed rate. If you have made all of your mortgage payments on time and your credit score has increased you may be able to refinance into a Fixed Rate Mortgage without increasing your payments.
If affordability is a determining factor in deciding your mortgage structure, ask your loan officer or mortgage broker if structuring your loan as an Adjustable Rate will give you more flexibility.
When deciding to refinance your adjustable rate mortgage (ARM) into a fixed rate mortgage, you first need to decide how long you think you will be in your home. If you are in the second year of a 5 year ARM, and only see yourself in the house for another 2-3 years, then you may want to wait until it is absolutely necessary to make the change. Your mortgage broker can advise you as to what the market may do, but they will not know what is in store for years to come. Concurrently they will also not know the number of years you will be in the home, along with any changes in your life that may require you to move.
Fixed Rates, Lowest Payments - Love it or hate it, the Payment Option ARM or Pick a Pay mortgage has become one of the most popular home loans in the USA, accounting for over 40% of new loans since 2005, and is definitely the fastest growing option in high cost states like California, Florida, New York, New Jersey and Connecticut. While many people love the 1% start rates, there are a lot of people who don’t feel comfortable with the possibility of payments increasing in as little as 1 month on many of the most common programs. The common wisdom is that Option ARMs are incredible products for savvy homeowners and investors, but may be too powerful for the average homeowner to handle.
Introducing Hybrid Option ARMs
For the rest of us, an innovative class of new loans has been recently introduced for homeowners who want the security of a Fixed Rate mortgage, with the flexibility and exceptionally low payments of an Option Arm. These home loans go by many names, including Hybrid Option & Fixed Option Arms, but they have one thing in common: A fixed payment for several years. Some of these mortgages have fixed interest rates, some of them have fixed minimum payments which don’t go up, and some of them have both!
So what are the key benefits of Hybrid ARMs?
- Fixed Minimum Payments for 1, 3, 5, 7 10 or even 30 years
- Fixed Interest Rates for the Full Term on Many Programs
- Minimum Payment is typically 55% lower than a Regular Loan or better
- Increased Cash Flow, Decreased Risk Makes Housing Affordable & Secure
- Interest Only Payment Option Continues Even After Recast
- Greatly Reduces the Sticker Shock of a Fixed Mortgage
- Greatly Reduces the Payment Shock of an Adjustable Mortgage
- Greatly Reduces Negative Amortization
- Retains Flexibility of an Option ARM
Like an Option ARM, Your Payment Coupon Has 4 Options on it
1. Minimum Payment
2. Interest Only Payment
3. 15 Year Fixed Amortized Payment
4. 30 or 40 Year Amortized Payment
A Real World Example
Your Minimum Payment is generally close to half of what a regular fixed rate mortgage would cost, or otherwise would 3% or 4% lower than the fully amortized payment. Let’s take a look at a hypothetical scenario. Jane has a house in California which has been appraised for $400,000 and has a traditional fixed rate mortgage on the property of $200,000 on which she pays $1467.00 per month before taxes & insurance. If Jane were to refinance this mortgage into a Fixed Rate Option ARM, her minimum monthly payment would be about $800 dollars, about 55% of the cost she was paying previously. And both rate and minimum payment would still be fixed for 3, 5, 7, 10 or even 30 years. In fact Jane could take out $100,000 in cash out when she refinanced and she would still have a minimum payment of $1200 per month, and both rate and payment would remain fixed for 3, 5, 7, 10 or even 30 years.
But Do I Qualify?
Because of the very low effective rate of this financing and the very generous terms, these types of loans are generally available only to borrowers with credit scores of 620 or more. If you don’t know your credit score, you should call your loan officer and take a good look at your credit together. Other things to look out for are any late payments on your mortgage in the past 1 to 2 years, and of course any serious delinquencies like bankruptcies, liens or judgments on your credit report. Also, you will usually be limited to borrowing no more than 80% to 95% of the value of your home, although 100% ("No Money Down") financing is available to qualified borrowers. And if you talk to your loan officer and they haven’t done a lot of Hybrid ARMs, get a new mortgage company, because there are a lot of ways they can steer you wrong simply out of ignorance. These Hybrid loans are very new, very powerful financial tools and are best handled by those with extensive experience with the product.
Fixed Rate Minimum Payment Option Loans are an increasingly popular and lower cost alternative to Interest Only mortgages, and are often referred to as Secure Option mortgages.
Fixed Rate Mortgage Or Adustable Rate Mortgage? - Borrowers have there choice of many different loan programs today. The most common choice is between a fixed rate mortgage and an Adjustable Rate Mortgage (ARM). Choosing between the two mortgages depends on many factors.
If you prefer to have an adjustable rate mortgage, be sure to understand the terms of the prepayment penalty. The prepayment penalty (PPP) can be as high as the amount of the interest for 6 months. Borrowers will enjoy the lower interest rate, but be sure to understand what you are agreeing to.
One of the biggest factors is how long you plan to live in the home. If you know there is a strong liklihood that you will be in the house for 10 or more years then you should definately go with a fixed rate loan. If however you only plan on being in the new home for 3-5 years then there are a few options to consider. You may be able to get a better rate on a 5,7, or 10 year ARM than on a 30 year fixed mortgage. Then it is up to you to determine whether the monthly savings is worth the risk of adjustment if you end up living in the home longer than you anticipated.
Many investors prefer shorter term adjustable rate mortgages because the reduced initial interest rate means more monthly cash flow. Investors often have a specific time frame by which they plan to have resold the property. The higher rate of a 30 year fixed mortgage is useless if you know for sure that you will have sold the property in 12-24 months.
Another factor to think about when deciding whether to go with a fixed interest rate or an adjustable rate mortgage is to look at the market, the current market trend and the forecast on what interest rates are expected to do in the future. If interest rates are expected to climb for the next 3 years then getting into an adjustable rate mortgage that will be less than 3 years would probably not make a lot of sense in most situations. Of course there is no way to be sure of what interest rates are going to do next month let alone in 3 or more years, but we can make some very educated guesses after analyzing the current market conditions and the current economy while looking over the past trends and the economic forecasts. Talk with your mortgage professional to find out whether a fixed rate mortgage or an adjustable rate mortgage is the best for your situation.
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Information listed above is to be used for educational purposes only and is not guaranteed