Refinancing To a Fixed-Rate Mortgage
In this blog, we will cover refinancing to a fixed-rate mortgage. ARM stands for adjustable-rate mortgages. Many borrowers with an adjustable-rate mortgage often decide refinancing to a fixed-rate mortgage will make more sense when rates are low.
Adjustable-rate mortgages are 30-year term loans with an initial fixed-rate period and subsequent adjustment periods.
In fixed-rate mortgages, the principal and interest remain the same and are fixed for the loan term. Most fixed-rate loans have terms of 15 or 30 years. The loan is paid off once the homeowner pays the principal and interest, which cannot change for 30 years. In the following sections, we will cover refinancing to a fixed-rate mortgage.
How Does ARM Work?
With adjustable-rate mortgages, even if interest rates change, the mortgage loan gets paid off in 30 years. The difference with adjustable-rate mortgages is that the principal and interest may change year after year after the initial fixed-rate period.
Adjustable-rate mortgages are good for first-time homebuyers who intend on buying starter homes and upgrading in the next three to seven years or homebuyers planning.
Homeowners considering refinancing to ARM instead of a 30-year fixed-rate mortgage need to consider how long they intend to stay home. Again, there are pros and cons in refinancing to ARM versus a 30-year fixed-rate mortgage. This article will discuss and cover refinancing to a fixed-rate mortgage on a home loan.
Basics Of Adjustable-Rate Mortgages
The way adjustable-rate mortgages work is that there is an initial fixed-rate period, and after the fixed-rate period expires, rates can adjust every year for the balance of the 30 years. Adjustable-rate mortgages are calculated by adding the index to a fixed margin, which yields the mortgage rate.
Mortgage rates on adjustable-rate mortgages are not always necessarily lower than fixed-rate mortgages. Make sure you price out the adjustable rate versus the fixed-rate mortgages.
The fixed margin will remain constant for the 30-year mortgage loan term—the index changes. Lenders choose which index they will base the mortgage loan on. For example, on a 5/1 ARM, borrowers will get a fixed rate for the first five years of the term of the mortgage loan, and in the sixth year and thereafter, the mortgage rates will adjust depending on the index.
Benefits Of Refinancing To a Fixed-Rate Mortgage Versus ARM
When rates are low, and you are financing your dream home, which you intend to live there forever, financing or refinancing to a fixed-rate mortgage is the best option. The right-hand rule in refinancing to ARM instead of a 30-year fixed-rate mortgage loan is if you do not intend to live in your home for a long time.
Many home buyers purchase a starter home and do not intend to live in their new home forever. Homebuyers who purchase a home and intend on moving after five to ten years may consider financing to an ARM.
Homeowners with a higher interest rate and when rates drop may want to refinance to ARM if they do not intend to live in their home for more than five to ten years. Adjustable Rate Mortgages are normally more than 0.50% less than 30-year fixed-rate mortgage rates.
Why Choose ARM Versus Refinancing To a Fixed-Rate Mortgage
Those homeowners looking for the lowest principal and interest monthly payments may want to consider refinancing to ARM instead of a standard 30-year fixed-rate mortgage due to the lower rates on adjustable-rate mortgages. Adjustable-rate mortgage loans have much lower mortgage rates than 30-year fixed-rate mortgages.
However, your principal and interest can change on adjustable-rate mortgages every adjustment period. Fixed-Rate mortgages, the principal and interest is fixed for the duration of the loan term.
Lower mortgage rates yield lower principal and interest payments. Mortgage rates are at a historically low high. However, rates are expected to drop. Adjustable-rate mortgages also benefit homeowners planning to refinance their homes in the next three years. There are talks and rumors that the Federal Reserve Board will raise interest rates again this year.
Comparing Rates of Fixed-Rate to ARM
Mortgage rates on ARMs can adjust yearly or after a certain period after the initial rate period for the remaining 30 years. There are pros and cons to adjustable-rate mortgages. For homeowners needing analysis in refinancing their current home loan, please contact us at Preferred Mortgage Rates at 509-953-2099 or text us for a faster response. Borrowers can also email us at amanda@gustancho.com. We are lenders with no overlays on government and conforming loans.
The team at Preferred Mortgage Rates has a network of over 210 wholesale lending partners of government, conforming, non-QM, business, consumer, and commercial loans.
We are available seven days a week, evenings, holidays, and weekends to answer your mortgage refinance questions. We can analyze which mortgage loan program is best for you, whether refinancing to ARM or your home loan to a fixed-rate mortgage loan.
