We have noticed this year that as the Federal Reserve raises key interest rates that we see more mortgage companies advertising refinancing with Low ARM rates. While adjustable rate mortgages are not for everyone, they do have a niche in the mortgage market as many homeowners can find real monthly saving when converting to a low rate ARM loan. With negative amortization programs nearly disappearing, ARM loans are considered less risky as more and more people are educated on the pros and cons of adjustable rate refinancing in today’s lending environment.
Homeowners across the country are Refinancing with an ARM Mortgage in 2018 when they are seeking payment relief and cash back.
There is a reason that 30-year, fixed mortgages are the most popular home loans on the market. Most people like the stability and certainty of a fixed payment for the life of the loan. You also are locking in a payment on your home that will be the same regardless of what happens in the market years from now. That stability makes sense for a lot of Americans; our homes are usually our most important asset, and it is good to know what the payment will be for 20 or 30 years. But there are times when getting an adjustable rate mortgage or ARM may be smart, too. An ARM usually has a fixed rate period of 1, 3, 5, or 7 years. At that time, the interest rate can go up or down based upon the index rate that is used. Most ARM’s are tied to the one-year Treasury yield, LIBOR or COFI. However, ARMs do have caps that limit how much the rate can go up in a year, and for the entire term of the loan.
If you are thinking about refinancing your home loan, here are several reasons why you could consider an ARM:
Fixed Mortgage Rates Are Rising
If you have been paying attention to the markets, you have noticed mortgage rates have risen noticeably in the past 18 months. A year ago, it was possible to get a 30-year, fixed rate mortgage at 3.6% to 4% or so. Today, the typical interest rate for a 30-year fixed rate loan is nearly 4.5%. There are signs that rates could continue to creep up throughout this year, with the possibility of 5% rates on the horizon.
People who want to refinance a home loan usually are doing so to reduce their interest rate. But with rates for fixed rate products above 4.5%, some of these borrowers may find that they will not save money. That is probably why refinances of first mortgages have dropped markedly since the start of 2018.
But ARM introductory rates are always lower than fixed rates. It is possible today to get an ARM for five years in the range of 4%. If you have a fixed rate mortgage that is 4.5% or higher, you may really benefit from getting an ARM. You could enjoy a low interest rate for three or five years, and by that point, rates may have gone down again, and you can refinance into a fixed rate product. Now may be the best time to refinance your house.
You Plan to Move In a Few Years
If you are nearly certain you will put the home on the market before the ARM introductory period ends, getting an ARM mortgage is a smart decision. You may be able to get a lower interest rate on your home loan before you sell the home.
But of course, plans do change, and it is possible that you will not move when you think. Job plans can change, and homes may not sell as quickly as you thought. You could need to refinance the home into a fixed rate mortgage, which could carry a higher interest rate than you had with the ARM.
You Can Pay Off a Lot of Principal
Some borrowers with a lot of income may get an ARM mortgage rate because they know when the interest rate is about to go up, they can pay off most or all of the mortgage. This allows them to enjoy that low interest rate for years and then be mortgage free.
You Think Mortgage Rates Will Fall in Coming Years
This is really no more than a gamble, but if rates do fall in the out years of your ARM, your interest rate could fall. But it is very difficult to predict with any certainty where rates will be next year let alone in five years.
Considerations with ARM Rates and Refinancing into an Adjustable Interest Rate Mortgage
Above are the best reasons to consider getting an ARM. But note that ARMs are not the best choice for people who want to stay in the home for many years. If you are going to be in the home for 20 years, you could end up paying a much higher interest rate on the home loan.
Another reason to not get an ARM is if you are on a limited income or think you will be on a limited income in the next several years. You do not want to risk your home payment going up markedly in this situation.
Lastly, if you are risk averse and will have trouble sleeping at night with an ARM mortgage, you should not get one. Some homeowners cannot handle the stress of not knowing what their payment will be in five or seven years. For these homeowners, it is always better to have a fixed rate loan, even if the rate is higher than it would otherwise be in the first several years of the loan.
Current 5/1 ARM Rates
According to Bank Rate, the average interest rate on a 5/1 ARM is 4.27%. The 5/1 ARM is mortgage that is fixed for five-years and then becomes a variable interest loan after the 60th monthly payment. Of course ARM mortgage rates could be substantially higher when the mortgage payment becomes adjustable. So, yes there is a risk. Bank Rate says the monthly payments on a 5/1 ARM at 4.27% would cost about $493 for each $100,000 borrowed over the first sixty months, but could rise by hundreds of dollars afterward, depending on the adjustable rate mortgage terms and the market conditions. Read articles – BankRate Says Interest Rates Are Mixed.