There are advertisements from mortgage lenders all over the television, radio and newspapers to refinance from an ARM into a fixed rate loan. This can be confusing since many people don’t know what an ARM is and if they have one, let alone if they should keep it. Adjustable Rate Mortgages (ARM) have a fixed rate for a period of time. They are typically fixed for three, five, or seven years. When the fixed portion is over the rate becomes adjustable and moves with market fluctuations.
There are clear benefits to an ARM loan, including:
Advertisement
- Lower interest rate
- Interest only options
- Ability to float with the market
There are also disadvantages of an ARM loan, such as:
- Lack of stability.
- Fear of loss.
- Uncontrolled interest rate and payment changes.
ARM loans can offer borrowers some financial flexibility. What it cant do is provide peace of mind. Their interest rate is typically tied to LIBOR or the MTA. When those indexes move, so does your interest rate. If everything is running smoothly, and the financial markets remain unchanged, that doesn’t matter. If the economy and the markets are bumpy selecting an ARM loan can cause a lack of stability as you worry about how your interest rate and payment might change in the coming months or years.
Once the fixed rate period for an ARM loan is up the loan will instantly convert to an adjustable rate and can change as often as monthly. The interest rate during this period will be determined by a margin over the index. For example a margin of 1.25% above LIBOR means that your interest rate is determined by looking at the current LIBOR and adding your margin. Every month, or year depending on the loan structure, your interest rate will be set by the market. If the index is going down you will benefit from a lower rate. If it goes up your interest rate will also increase.
Consider refinancing to a fixed rate mortgage through a licensed mortgage banker to secure a fixed, low monthly payment that you can count on. Refinancing is easy. Contact a mortgage lender that is FHA approved and talk to them about your various options. There are FHA streamline refinance programs that do not require an appraisal and can easily take you from an adjustable rate mortgage to a fixed rate loan.
If you are planning on staying in your home for a long period of time, having a fixed rate mortgage makes the most sense. You will have a set payment that you can budget for and every month part of your payment will go towards paying off the principal balance of your home. Fixed rate mortgages are long term solutions for those that enjoy stability and sticking with a budget. A mortgage banker can go over loan options with you to determine if a fixed rate or ARM mortgage loan is right for you. It is important to consider your personality and comfort zone when making this decision. A mortgage is something you live with for a long time so choose the loan that is right for your pocket book and your peace of mind.
