Tips On Refinancing Your Home - When To Convert To an ARM

Common advice tells borrowers they should refinance their adjustable rate mortgage (ARM) to a fixed-rate mortgage. However, there are times when it makes better financial sense to do the reverse. The prime reason is that an ARM provides lower rates.

Low Interest Rates Of An ARM

An ARM's primary benefit is a lower interest rate. Typically a couple of points lower than a fixed-rate mortgage, an ARM can save you thousands. The downside is that an ARM's rates can rise.

However, if you are planning to move in a couple of years or expect rates to drop, then an ARM may be worth the risk. If you are worried about rising rates, you can select an ARM with rate and payment caps. There are also ARMs that convert to a fixed-rate after a preset number of years.

Smaller Payments With An ARM

An ARM can also give you smaller payments temporarily through lower rates. Even though these payments may rise, you can expect your wages to increase with the rate of inflation as well.

If you need some temporary breathing room in your budget, you may find that an ARM can help. There is always risk with this option, especially if you are planning on a promotion or career change in the future.

Considering The Costs

While lower interest rates can save you money, the loan costs can eat into your financial savings. Loan fees can easily add up to $3000, in addition to points. The general rule of thumb is that after three years, you will be saving money on the refinance deal.

There are times when you can see a savings earlier, especially if rates are more than two percent lower or you find a low cost refinancing deal.

To really know if you will save by refinancing, you need to research rates. Ask for quotes from several lending institutions. Then figure out your interest payments with the help of a mortgage calculator. Compare these with your current interest charges, and you will know what type of savings to expect. Subtract the loan fees and points, and you will find if you can come out ahead in the end.

Author: Carrie Reeder