Refinancing With An Adjustable Rate Mortgage Pros And Cons
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Refinancing with an Adjustable Rate Mortgage: Pros and Cons
Adjustable Rate Mortgages (ARMs) have recently garnered some negative attention, yet they offer distinct advantages that shouldn't be overlooked. If you're thinking about refinancing your fixed-rate home loan, an ARM might be a worthwhile option. Depending on your circumstances, you could benefit from reduced repayments and better interest rates.
Advantages of ARMs
One of the primary benefits of an ARM is the typically lower interest rates compared to fixed-rate loans. These rates fluctuate over the life of the loan based on market conditions. Lenders use specific indexes to determine ARM rates. Unlike fixed-rate loans, which maintain stable rates but might incur higher costs, ARMs offer potential savings through reduced interest rates. Even a minor difference?"like half a percent?"can translate to significant savings over time.
Potential Risks
Refinancing with an ARM does carry some risks. The most precarious type has no fixed period, allowing lenders to adjust rates frequently, even monthly. These loans offer the lowest initial rates due to their inherent risks. Alternatively, ARMs with a fixed term provide more security, as the lender commits to maintaining the rate for a specified period before adjusting it.
Is an ARM Right for You?
Many people, particularly those who plan to sell their homes or refinance within a few years, can benefit from an ARM. Given that many American families change homes or refinance roughly every four years, they can take advantage of lower rates without fearing future increases. However, if you're unable to refinance or sell after the fixed-rate period, there's a risk of rate hikes leading to larger payments.
For families in lower income brackets or those aiming to reduce their principal quickly, an ARM can be a strategic choice. With lower interest rates, you'll have more funds available to pay down your principal, reducing the total interest paid over the life of the loan, often without increasing your monthly payments.
In summary, while ARMs do involve some risk, they also provide opportunities for significant savings and faster mortgage payoff. Carefully assess your financial situation and future plans to determine if an ARM is the best refinancing option for you.
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