A common thing for borrowers to do is refinance an adjustable rate mortgage (ARM). But it might not always be the best thing to do. Depending on how high interest rates go up, there are times when converting your mortgage could cost you more than what you would save by locking in your interest rate.
Costs Added Up
Before you accept a refinancing offer, think about how much it will cost you up front. If you want to refinance a $100,000 loan, you can expect to pay between $1,000 and $3,000 in loan fees. That doesn't include discount points.
To make up for these costs, you need to plan to live in your home for at least a few years. Also, if you only have a few years left on your mortgage, you might be better off keeping it the way it was.
What's good about refinancing?
The most common reason to refinance an ARM is to lock in a low rate. By switching to a fixed-rate mortgage, you can be sure that your interest rate won't go up or down every year.
You can also build up your equity faster by switching to a short-term loan or biweekly mortgage. You could save thousands of dollars on interest payments if you made bigger monthly payments.
When you shouldn't refinance
There is always some risk with an ARM, but there are times when it makes financial sense to keep it. For example, unless interest rates go up by more than a couple of percentage points over the course of your loan, you will probably pay more in loan fees than you will save. You should also keep your adjustable-rate mortgage (ARM) if the current rates are 1% or less than the rate on your ARM.
If you plan to move soon, you might also want to keep your ARM. When people move out of their homes within seven years of buying them, it doesn't make sense to refinance because you won't get your money back.
Picking A Lender
Just like with any other mortgage, you should look into several lenders before picking one. Ask for quotes on both prices and costs. To find the best way to pay for something, you will need to add up all the costs. You can also look for online mortgage lenders on the web. In order to stay in business, these lenders often offer lower interest rates or lower closing costs.
