Refinancing an Adjustable-Rate Mortgage

Posted by  on Oct 08, 2010

Lowest Mortgage Rates--Wave Bye-Bye

Freddie Mac's survey for week ending April 15, 2010 may have shown a slight easing off on current mortgage rates, but you'll struggle to find many experts who believe that the trend is going anywhere other than up. Those who have refinanced mortgages over the last year or so, and who have chosen 30-year, fixed-rate mortgages (FRM), can allow themselves a warm glow, and a contented--maybe even smug--smile.

Because they have secured for themselves an extraordinarily good deal. They have one of the lowest mortgage rates in history, and they've locked it in for 30 years. Amazing.

Adjustable Rate Mortgages (ARMs)

But what about those who haven't refinanced, and who still have ARMs? How worried should they be?

Well, it very much depends on their circumstances. ARMs can be considerably cheaper than FRMs during the initial period during which their rate is fixed. For example, that Freddie Mac survey says that a 5/1 ARM (one that has its rate fixed for the first five years) currently has an average interest rate of 4.08&, compared with the average of 5.07% for a 30-year FRM.

So anyone who's more interested in keeping monthly payments low may be well-advised to have such an ARM if planning to move home sometime within the next five years.

Refinancing Break-Even Analysis

If your situation is less clearcut than that, you should perhaps calculate the break-even point at which refinancing becomes worthwhile for you. First, you need to establish how long you're going to stay in your current home and/or how long your existing ARM will remain at its current low rate. Then you need to establish what it will cost you (closing costs, and so forth) to refinance. And finally, you can use the ShopRate mortgage calculator to see what your repayments will be, and how quickly you'll break even on the refinancing.

Refinancing Possibilities and Impossibilities

One problem facing some who wish to refinance an ARM was highlighted recently in the Wall Street Journal. A Journal reader's son had limited options because his loan was "underwater"--in other words, the balance owing was higher than the value of the property.

With the recent fall in property prices this is a common problem, but the Journal writer thought that--in the particular circumstances described--refinancing was so important that the borrower should borrow from his 401 (k) account to facilitate the new loan.

You may not need to go to such extreme lengths, but if you'd like to explore your refinancing options, you can start by finding a mortgage quote here.


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