ARM Refinancing

200_home-loans11-150x150Any homeowner considering refinancing a mortgage these days should ignore the potential advantages of utilizing the inherent flexibility of an ARM, better known as the adjustable rate mortgage. While they may have fallen from the top tier of most mortgage financing options in the past few years, mostly because the interest on fixed-rate mortgages have dropped to all-time lows, they do still contain some positive elements for certain borrowers to consider when refinancing. After all, it boils down to what makes the most financial sense in terms of the overall refinancing package.

The Most Affordable Rates

The adjustable rate mortgage, the ARM, generally has the lowest rate available on most mortgages offered by lending institution. This is primarily due to the fact that the borrower is initially locking in a specific rate for a specific amount of time. This is typically from one, to five, to seven years or longer, depending on the loan type. Market conditions will eventually take over when the initial time-frame on the loan runs out, and the interest rate will then reset to the prevailing rate. The general reason behind the ARM’s favorability factor is that it allows the most flexibility for borrowers who do not plan to reside in the residence for any long period of time. If they are considering a relocation any time inside the first ten years of the mortgage term, then there is no real financial motivation to take on a 30 year mortgage commitment at a higher rate. The tactic is for the borrower to take maximum advantage of the lower interest rate structure of the ARM for the period they plan on staying in the home, and reaping the monetary benefits.

Rapid Equity Build-up

The ARM is also an excellent choice for borrowers who would like the option of building up their equity at a much faster rate. For instance, on a conventional 30 year fixed-rate mortgage structured with a 4.0% rate of interest on a $200,00 loan will yield a monthly repayment commitment of $955. The loan principle, after the first five years of the term, will have been reduced to a little over $180,000. By contrast, that identical mortgage of $200,000 with a 5 year ARM structure set at a 3.0% interest rate will yield a $843 monthly repayment instead. Therefore, if the difference in monthly payments of $112 were added to the repayment amount ( to equal the $955 on the fixed-rate loan ) then after the same 5 year period, the loan principle will have been reduce to $170,000. This would represent a $10,000 equity increase within the same span of time.

Loan Balance Reduction

reduction-150x150Utilizing the benefits of an ARM makes additional sense for a borrower that wishes to reap the monetary gains of a 15 year loan with a fixed interest rate, but does not want to take on the added burden of the higher monthly payments. ARMs are structured with lower interest rates along with significantly lower minimum monthly payments to go along with it. By utilizing this option, the homeowner can take advantage of two additional benefits by paying the principle down much faster, as well as having the great flexibility of coming up with smaller monthly payments when and if the budget requires it. On a 7 year ARM, there is a 60% difference from that of a 15 year fixed-rate loan regarding the minimum monthly payment requirement. If the borrower elects to pay out the additional 40% each month over the course of the same 15 year period, the principle on the same loan would be virtually cut in half. Naturally, sometime during that loan term the ARM rate will either have reset, or the borrower can elect to refinance again at the current rate at that time, but also paying interest on that new loan with a drastically reduced principle balance.