Refinancing Options: Moving ARM to a Fixed Rate or to a New ARM

Refinancing an ARM can be a confusing process—because the interest rate is about to change for you, and you don’t know exactly what it might be, it can be difficult to determine what your savings will be. Your conditions and intentions over the next few years will also play a part, as will your prospects.

Is Moving an ARM the Best Decision?

Moving an ARM to a fixed rate loan can be an easier decision, but not always the best one. If the interest rate on your current loan is about to start climbing, you may be considering a fixed rate loan simply because it’s more stable. While this may be a good reason for your situation, you may want to consider a reduced term on your fixed rate because you will begin paying your new mortgage with a mostly-interest payment.

Consider Alternative Terms

If you have made five years with of payments, consider reducing your term to 25 years or less—according to rightloans.com, the difference on a $100,000 loan at 6.5% interest would be about $25,000, just for reducing your term by five years! The best thing about that? Your increase in payments would only be around $45 per month (as opposed to the traditional 30 year mortgage).

Going from ARM to ARM: What to Keep in Mind

If you are considering going from an old ARM to a new ARM, you are likely looking at reducing monthly payments. This will apply only if the rates have gone down, of course, but again remember that your initial payments will be like your initial payments on your old loan—mostly interest. While this has advantages at income tax time, it may not amount to much for you. Consult your tax specialist for information on how your refinancing will affect your taxes.

How Long Will You be in the Residence?

One thing to consider when choosing between a fixed rate mortgage and a new ARM is how long you are planning to be in the house. If you are only going to stay there another five years, the ARM might be of more benefit, especially if you aren’t doing any improvements and simply want to save on your monthly payments. However, you are going to improve the property, stay there a long time, or both, the fixed rate mortgage may be for you. And remember that the term you choose will depend on your ability to handle monthly payments and how much equity you want to build in the home.