If you are planning to refinance a mortgage, you are probably focused on getting the lowest monthly payment possible. Current mortgage rates are still near historic lows; so if you can qualify for refinancing, now may be the time to go for it. But when you're shopping around to compare mortgage rates, you may be offered quotes for fixed-rate loans and adjustable-rate mortgages (ARMs).
How do you decide if an ARM mortgage is the right loan for you?
Lower mortgage rates:
One of the main reasons many homeowners consider ARMs for a refinancing is because they have lower interest rates than fixed-rate mortgage products. But that lower interest rate only will last for a certain period of time before it resets. For instance, you might get a hybrid ARM with a low interest rate that won't change for the first five years. Once that period has ended, the rate adjusts based on an economic index such as the LIBOR (London Interbank Offered Rate).
When the economic index adjusts, the mortgage lender adds a margin to the index to arrive at your new mortgage rate. The margin covers the mortgage lender's cost of doing business and profit. If the index moves up, so does your interest rate and the monthly payment per your loan agreement (rate increases and decreases are limited by caps and floors).
Is your income reliable?
Some homeowners choose ARMs because they don't plan to live in their current house for more than a few years. They may want to take advantage of lower monthly payments until they sell. This strategy could help you reduce monthly housing expenses. It's important to consider the possibility that you might not be able to sell the home before the interest rate on the mortgage resets.
No one can predict exactly where the housing market is heading, but if you get an ARM, ask yourself if you could still afford the payments if the loan resets. Have the mortgage lender run through the numbers with you to get an idea of how your payments would change with different interest rate scenarios.
Fixed-rate loans offer stable payments
Refinancing into a fixed-rate mortgage may be a better option if you want stable monthly payments that won't change. In fact, many people who bought their home with an adjustable-rate mortgage end up refinancing to get get payments with a fixed-rate loan. Find a mortgage lender who is willing to take the time to explain the various mortgage loan programs that may work best for your situation. Do not allow yourself to be pressured into signing up a any type of mortgage if you don't feel comfortable with the information being presented.