When is a good time to switch from an adjustable-rate mortgage to a fixed-rate mortgage?
When interest rates are at an all-time low is the best time to refinance. If you're waiting for this option, you should keep an eye on the market and see what our financial leaders do. Most of the time, it depends on how our economy is doing, and there is a lot of talk about it before the prime interest rate goes up or down. Listen to what's going on around you.
Refinancing to a fixed rate is also a good idea if you plan to live in your home for the duration of the loan. Within 5 to 7 years, 90% of the people in our country move to a new or different home for one reason or another. But there are also people who stay where they are and want steady payments. When you know for sure how much you spend each month, it's much easier to plan your budget. If you are one of these people, a fixed rate mortgage is the best way to refinance.
If the ups and downs of your mortgage payment are keeping you up at night, contact a good mortgage broker and start the refinancing process right away. It's not worth getting upset over!
When should you think about an ARM?
When you DON'T meet the requirements to buy a house or switch to a fixed-rate mortgage. Sometimes this is the only way to buy something because you have bad credit, a lot of debt, or not enough income. If the ARM loan makes you nervous, you can switch to a fixed rate loan at a later date.
When your new monthly payment will be a lot less than your current payment plus all the payments for your credit cards and other loans. If you've lived in your home for 5–7 years and are paying 10, 15, or even 20% interest on consumer debts, you should refinance your mortgage and use your equity to pay off your high-interest debts. This will change your monthly cash flow in a big way and may give you the breathing room you need.
When you DON'T plan to live in your home for more than 5 to 7 years because your family is growing, your kids are going to college, your job is moving, or something else. Why get a long-term mortgage with a higher fixed rate if you're only going to move or refinance in a few years?
When they refinance, homeowners who choose long-term fixed rates pay between 1% and 2% more than those who choose an ARM. That may not seem like much, but if you have a $250,000 mortgage, it makes a BIG difference in your payment.
When you CAN expect your income to go up because you got a promotion or a raise. Some employees get a raise every year that is based on a percentage of their current salary. This means that they can get a pretty good idea of how much their raise will be. If you're due for a promotion and expect to get one, you probably already know how much your new job will pay. These are great times to think about refinancing.
When you're OK with making small changes to your mortgage payment. Some people just don't worry as much about money as others. Most of the time, this is because they don't have to worry about meeting their basic needs and they have a steady, good income.
All of it comes down to the amount of risk. If you can't go to sleep at night unless you know that your monthly mortgage payment is $XXX, then you should get a long-term fixed-rate mortgage.
If you can sleep at night when you take some calculated risks, you may have other options.
