If your adjustable rate mortgage is going to adjust soon, you may want to consider locking in a fixed rate soon.
As of January 2017, 30 year, fixed interest rates are in the low 4% range. For the last several years, it made sense to have an ARM in many situations, but it looks like these days, mortgage rates are on the way up.
The Federal Reserve already raised rates once in December 2016, and may do so several more times this year, if reports are accurate.
If you have been riding on your ARM through the adjustments, you have been enjoying very low rates. But it may be time to change your mind and consider refinancing into a fixed rate mortgage.
Below is more information about adjustable rate mortgage and why you may want to lock in a fixed rate soon.
ARMs Adjust With the Market
An adjustable rate mortgage will fluctuate over time, and this can introduce a degree of financial risk, especially when interest rates are on the way up. If you have an ARM on your home, you do not know for sure what the rate will be like in 10 or 15 years.
For many people, this uncertainty is scary, but recently, it has actually been rewarding.
From 2003 until 2015, homeowners who had an ARM were able to beat fixed mortgage rates. This might make many people think you should always have an ARM. But this is not the case.
The Fed first increased the Fed Funds Rate in December 2015, and again in December 2016. That is why we are recommending that people take a close look at what rates are doing and possibly lock into a fixed rate soon.
Here are some other reasons to think about locking in a fixed rate this year:
#1 Stronger Economic Growth
Some financial experts think that economic growth is going to be improving in the next two years. Some of them believe that Trump’s pro-growth policies will result in better economic growth.
We do not know for sure if this will happen, but if it does, interest rates are going to go up significantly from where they are right now. An improving economy causes the LIBOR rates to go up, and that will cause your ARM rates to rise.
You still can lock in a rate in the low 4’s, so you may want to do so now.
#2 Consumer Confidence Is At 13 Year High
The Consumer Confidence Index was at 113.7 as of December 2016. This was a 5 point increase from November.
Since the election of Donald Trump, there has been a major surge in consumer optimism in terms of jobs, income and the economy overall.
If the public does see a stronger economy in 2017 and beyond, it is likely to cause interest rates to rise, which will increase the cost of your ARM.
#3 Stock Market Is Nearing 20,000
Another sign of economic growth is that the Dow is at nearly 20,000. This is an all-time record and could bode well for the economy in the future. With rates still around 4%, you may regret not locking in a low rate soon!
If you are still weighing the pros and cons of a refinance, you should keep these factors in mind:
- Know the terms: Take a look at your ARM paperwork and see how often the loan can adjust. How much can it adjust in a year? These are very important things to consider. It is not as if the loan can go from 3% to 10% in a year. You need to know exactly how much it can adjust and when to make a good decision.
- How long are you in the home? If you plan to stay in the home for years, you may want to think about locking into a low fixed rate while you still can. If you are going to move in a year or two, you may want to ride it out and take the risk.
- Refinance costs: Wherever you are shopping for a refinance mortgage loan, check to see what the fees are. You also want to know what your closing costs will be. By knowing what a refinance will cost you, you can figure out how long it will take you to recover those costs.
- What is your credit score? If you have kept your credit score in good shape, you are in better condition to refinance now. It is a smart move to keep your credit as high as you can at all times so you can refinance whenever you think the time is right.
- Roll in refinance: You may have the option of rolling your closing costs into your new loan. This can be wise if you intend to move in a few years.
Summary on Why Refinancing Out of an ARM into a Fixed Rate Mortgage May Make Sense for You
We think that early 2018 could be a good time for many people to lock in a fixed rate from their ARM. Rates are showing signs of going up significantly, given the economic signals.