Refinancing has become very popular ever since interest rates started to fall a few years ago. Home owners who found that refinancing is the way to go in order to reduce their mortgages may even refinance multiple times in the past few years. However, most borrowers choose to refinance into a fixed-rate mortgage, not realizing that adjustable-rate mortgages also have their advantages and may even be more beneficial for them.
Adjustable-rate mortgages have gotten a bad reputation over the past few years, being blamed in part for the large number of foreclosures. This made fixed-rate mortgages more popular than ever and the go-to mortgage for most people who refinanced. Interest rates on fixed-rate mortgages are, indeed, near record lows, but home owners who are considering refinancing should take a look at adjustable-rate mortgages as well.
What Are Adjustable-Rate Mortgages and How Do They Work?
Adjustable-rate mortgage loans start out, like fixed-rate mortgages, with a fixed interest rate period, which usually lasts for one to seven years. During this fixed-rate period, adjustable-rate mortgages are essentially fixed-rate loans. After this period ends, the interest rate is adjusted according to the mortgage loan terms.
Interest rates on an adjustable-rate mortgage are lower during the fixed-rate period than home mortgage rates on a fixed rate mortgage loan, making them ideal for home buyers who don’t wish to live in their home for a long period of time. Compared to fixed-rates mortgages, an ARM can save you several thousands of dollars during the fixed-rate period.
The Advantage of Refinancing Into an Adjustable-Rate Mortgage
The largest advantage of refinancing into an adjustable-rate mortgage is that you can take advantage of some of the lowest interest rates available in the fixed-rate period. The interest rate for that initial period will be lower than the interest rate on a fixed-rate mortgage.
Adjustable-rate mortgages are especially valuable for home buyers who plan on refinancing or moving after only a few years before the fixed-rate period comes to an end. They are also a good choice for those who expect the economy to make a good recovery and their financial situation to improve.
The Risk of Refinancing Into an Adjustable-Rate Mortgage
The biggest risk of refinancing into an adjustable-rate mortgage is that the interest rates on your loan might increase dramatically once the initial period is over. Interest rates are still very low right now, and it looks like there is no place that they can go but up. But a lot can happen during the fixed-rate period, so you might end up with an even lower interest rate once the adjustable-rate period starts. Alternatively, you can refinance or pay off your loan before the adjustable-rate period begins, and you won’t have to worry about a large increase in interest rates.
Besides refinancing or paying off your mortgage loan before the fixed-rate period ends, you can also plan for an increase in interest rates. By choosing an adjustable-rate mortgage over a fixed-rate mortgage, you will have a lower interest rate for the first repayment period, meaning that you could save or invest the difference. Having savings once that adjustable-rate period begins will help you significantly if the interest rates increase, giving you time to refinance.
Adjustable-rate mortgages should not be overlooked when refinancing. Depending on several factors, they can be quite beneficial and save you money. It is up to each home buyer to take a close look at his or her financial situation and future plans and decide which type of mortgage to refinance into. Just because adjustable-rate mortgages are seen as riskier than fixed-rate mortgages doesn’t mean that you will be unable to make them work to your advantage.