So you're going to refinance are you?

So you are refinancing your home are you? Here is a look at adjustable rate mortgages as opposed to fixed rate loans.

SO YOU’RE GOING TO REFINANCE ARE YOU?
Which is better thirty year fixed or the Adjustable Rate Loan?
 
 
Once you have decided to refinance, and come to the conclusion that you have sufficient equity to do so, let’s take a look at some of the different options available to us; the good and the not so good.
 
 
First off I want to tackle the issue of arms versus fixed rate loans. Let’s go over the pros and cons for two to five year arms. Here are the pros.
 
 
·         Adjustable Rate Mortgages offer a lower rate over a specified time limit, generally from 2-5 years.
 
·         The rate is often a percent lower than that of the fixed loan so payments can be significantly lower.
 
·         Because the rate is so much lower a client who could not qualify for a fixed rate loan may qualify for an adjustable rate mortgage .
 
 
Now here are some of the disadvantages to an adjustable rate mortgage.
 
 
·         After the fixed period of the loan is over the client faces a possible rate hike that may make paying loan payments impossible.
 
·         After getting used to a lower payment it’s hard to adjust up.
 
·         You may find yourself in a situation where you have to refinance even if the timing is bad for you and your situation
 
·         Beware of the two year arm with a three year prepay.
 
 
An adjustable rate mortgage does has it’s advantages if the circumstances are right. If you are getting buried in credit card debt and unable to afford the monthly bill, refinancing your mortgage and paying off the debt may just be what the doctor ordered. Now you debt is paid off and you have one lower payment to make. If you cannot qualify with a 30 year fixed try a two year arm. The interest rate and payments are going to be significantly lower, and now, affordable.
 
 
No that you have wrapped up your credit card and high interest debt in the new loan you have two or three years of making good payments to boost your score up. If done right, that is all you will need to have a significantly higher score. Next time around with a new and improved report you will qualify for a thirty year fixed and be done with it.
 
 
Now as far as the cons go, there are a number of issues here that can turn your mortgage experience into a nightmarish one at best.
 
 
Now fast forward two years and it’s time to refinance. You may not be ready for it, and interest rates may make this impractical, but what choice do you have. You are facing having an adjustable rate mortgage, and one this is going to just keep climbing. This could be your nightmare.
 
 
Perhaps you were one of the ones to take advantage of a newer lower rate and purchased an auto that previously you could not have afforded. Your lifestyle may have undergone a total change and now you may have a hard time adjusting to a new payment that could be higher than you ever had. Again, another nightmare.
 
 
You might be one of the ones finding themselves in a loan that they could no longer afford. While you were able to do fine with the seven hundred dollar payment you have been enjoying, the new thousand dollar one may not work well with your current situation.
 
 
And finally, beware the two year arm that is saddled with a three year prepay. If you are in one of these loans chances are it was not disclosed, or just hurried over so you didn’t notice that small detail. Now, not only are you going to have to refinance at a higher rate, you also are getting hit with a prepay of six months interest which can rapidly add up to 12-15 thousand dollars, and in some cases more.
 
 
So, in short, If you are considering an adjustable rate mortgage you would do well to sit down and take a look at your finances. If getting a lower rate is the only reason to take an arm, you miay want to investigate further.
 

Good Luck and happy refinancing.

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Comments

  • Sam Cass

    October 31, 2009

    With rates so low it's ludicrous to be refinancing with an ARM. ARMs and other variable interest loans are playing with fire. You can be sure that rates will higher in three years than they are now.

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