Refinancing With An Adjustable Rate Mortgage - Pros And Cons

Summary: Adjustable Rate Mortgages, also called ARM, have received some bad press lately. There are, however, as many advantages to refinancing with an ARM as disadvantages. If your current loan is a fixed rate home loan, and you are considering refinancing, an ARM loan might be worth your while. Depending on your situation, you could save money on repayments and get a better interest rate. An adjustable rate mortgage has significantly lower interest rates than a similar fixed r...

Adjustable Rate Mortgages, also called ARM, have received some bad press lately. There are, however, as many advantages to refinancing with an ARM as disadvantages. If your current loan is a fixed rate home loan, and you are considering refinancing, an ARM loan might be worth your while. Depending on your situation, you could save money on repayments and get a better interest rate. An adjustable rate mortgage has significantly lower interest rates than a similar fixed rate loan at any given time. The rates on an ARM change over the duration of the mortgage loan, based on current markets and trends. Lenders use an index to determine what the rate on an ARM will be. The fixed rate loan will never change interest rates, resulting in a stable, but possibly higher repayment cost. The biggest benefit of refinancing your existing mortgage with an adjustable rate mortgage is the possible saving from a lower interest rate. Though they seem insignificant, as small a difference as half a percent between interest rates can be equivalent to thousands of dollars spent or saved. When you refinance with an adjustable rate mortgage loan, you can experience some risk. The riskiest sort of ARM loan has no fixed term to it. Because this kind of loan has no fixed period, your lender may change the interest rates attached to the loan whenever they like. This can happen as often as every month or year. ARM loans with no fixed terms offer the lowest base interest rates because of this risk. An adjustable rate mortgage loan which is fixed for a certain period is the safer option. In this case, the lender agrees to maintain the same interest rate for a particular period of time before adjusting it. Almost anyone can reap some benefit from a fixed rate ARM mortgage loan. Because many American families will sell their homes or refinance their mortgages after only four years, there is little danger to them. If you fall into this category, you could gain much from the lower interest rates, without risking an increase later on. If you cannot refinance or sell your property after your fixed rate period ends, there is some danger that the rate will increase, and with that increase will come larger payments. However, for those families in a lower income bracket, or those who would like to pay off their principal more quickly than they would otherwise be able to, the ARM mortgage option can be excellent. By using an ARM loan to refinance your mortgage, your monthly repayments can be kept them same. The lower interest rate saves money which can then be applied directly to your principal. The lower your principal does, the less you pay in interest every month. This allows you to take years off the lifetime of your mortgage, without paying any more per month than you were before refinancing.