Interest rates are up in 2017, and the experts at Freddie Mac and The Mortgage Bankers Association say the upward trend is here to stay. Rising rates have some homeowners scrambling to lock in a low fixed rate, but for others, refinancing into an adjustable rate mortgage (ARM) could actually be the smart move.
Why would you refi to an ARM?
With an adjustable rate mortgage, your rate is tied to interest rate changes–which is why most borrowers prefer to lock in a fixed rate before things head north. It may sound crazy to refinance into an ARM with interest rates on the move, but there is one scenario that could warrant switching to an ARM right now: if you’re planning to move within the next few years.
Want to know if this is the right strategy for you? We’ll cover some of the key considerations of refinancing into an ARM in this post, including a review of the differences between fixed and adjustable rate mortgages, and why your plans to move (or stay) matter.
Adjustable vs. fixed-rate mortgage loans
First, a refresher course. With a fixed-rate mortgage loan, the interest rate is set for the life of the loan and does not change. Most people choose a fixed-rate mortgage when they refinance, which is understandable given the appeal of a stable rate.
As the name suggests, ARMs have interest rates that “adjust,” or change over time. The loan has an initial fixed-rate period, after which the interest rate changes periodically, usually tied to an index. Payments and total interest cost will go up or down with the interest rate.
So, who should refinance to an ARM?
There are two reasons you might consider refinancing to an ARM:
If you’re going to move before the initial interest rate of an ARM adjusts, an ARM’s fixed-rate period could save you money. The caveat is that you’ll need to recoup your closing costs from the refinance, so this strategy makes more sense for borrowers who are moving as close to the initial rate increase as possible–for example, in 5 years for a 5/1 ARM or in 7 years for a 7/1 ARM.
Here’s an example using Nerdwallet’s Refinance Calculator:
|Original Mortgage: $500,000||Refinanced Mortgage: $474,290|
As with all financial strategies, there is risk involved. If your plans change and you don’t sell or refinance before the interest rate adjusts, you’ll be stuck with higher payments that are potentially beyond your comfort zone. You should consider the risks carefully before refinancing into an ARM.
But for some borrowers, even those who have refinanced in the past, a planned move on the horizon makes refinancing into an ARM a potentially savvy financial decision. And if you’re worried about the time it takes to refinance, check out Clara’s hassle-free process–we pride ourselves on making it super easy for you to refi quickly and get on with your life.