Switching from/to an ARM
This is less common than the other situations on this list, but it does come up on occasion.
Choosing to do an adjustable rate mortgage (ARM) should really come down to how long you intend to live-in/keep the home. Many people decide to do an ARM because they don’t believe they will keep the home longer than the term on the ARM. Accepting an ARM almost always comes with a rate that is lower than the prevailing 30 year fixed rate. The reason for the lower rate is that the lender is guaranteeing the rate for a shorter period of time. After the initial fixed rate period the terms are historically worse than the prevailing 30 year fixed rate market.
If you had an adjustable rate mortgage in the last 5 years and it is currently in the adjustable period, chances are that your current effective rate is very low. That is great for now, but if your intentions are to be in your home for the next 10 years, getting the adjustable rate locked into a fixed rate with a predictable payment might be something you want to do.
Choosing to refinance from an ARM to a fixed rate will often increase the monthly payment, but what is gained in this situation is a predictable monthly mortgage payment.
Choosing to refinance from fixed rate to an ARM should decrease the monthly payment and interest, but what is lost is the predictability of the mortgage payment over the full term of the loan. If your intentions are to keep your home for only 5-7 years, this could make more sense for your situation than a traditional fixed rate loan.
Whenever we talk to our customers about refinancing their home loan, one of the most important concerns to address is the cost to refinance. In a refinance scenario, the cost of the refinance is as important as the interest rate. There are many lenders operating in the market that will tell you that the option they are presenting to you is a “no cost” or “low cost” refinance. For the consumer, you have to determine whether they are talking about “out of pocket cost” or actual loan fees. The best way to determine this is to get a written estimate of all costs.