Is It Time to Refinance Your ARM?
Are you facing a potential rate increase on your adjustable-rate mortgage? If so, refinancing can help you avoid higher payments.
Refinancing with a fixed-rate mortgage. If you plan to stay in your home for the long term and never want to worry about rising interest rates, replacing your ARM with a fixed-rate mortgage may be a smart move. With an interest rate that never changes, a fixed-rate loan gives you predictable payments throughout the loan term.
Refinancing with another ARM. If you plan to move within the next several years, you may want to consider replacing your current ARM with a new one. In most cases an ARM will start off with a lower interest rate than what you'd get on a fixed-rate loan, and that rate can stay fixed for anywhere from three months to 10 years.
Some borrowers who bought at the peak of the market with interest-only and option ARMs—who now have little, if any, equity in their homes—could have trouble qualifying for the higher payments of a fixed-rate mortgage. That's especially true as lenders begin to tighten their standards. Another roadblock to refinancing is prepayment penalties. In 2005, 84 percent of option ARMs carried a prepayment penalty that could force borrowers to come up with thousands of dollars if they decided to refinance within the first few years of their loan.
