An adjustable rate mortgage (ARM) is a type of
mortgage where the interest rate charged on the outstanding balance varies
based on a specified schedule. The interest rate is initially fixed for a given
period after which the rate is set periodically. There are many advantages
associated with the adjustable rate mortgage especially when compared to the
fixed rate mortgage. Below are some of the reasons why you should consider
refinancing to an adjustable rate mortgage.
You want a lower interest rate
A lower
initial rate is charged on an ARM when compared to the rate charged on fixed
rate mortgages. While the initial rate is fixed for a given duration of time,
the interest rate is much lower than the rate charged on a fixed mortgage at
any given time. This works to your advantage as it frees up some money at the
beginning of your loan term. This money can be useful in taking care of other
expenses or can be invested in an income generating project.
You’re selling soon
An ARM is
ideal for home buyers who wish to sell in the near future. For buyers who
foresee a job transfer to another location or a need to upgrade to another
house, for example when starting a family, the lower ARM initial interest rate
provide a better and cheaper option. Once the house is sold, the loan can then
be paid off in full. It is important to note that some contracts stipulate that
a penalty is charged if the loan is paid off early. This should be considered
while refinancing the mortgage.
You want to improve your financial standing
An ARM
mortgage is ideal for homeowners who want to improve their financial standing.
The adjustable rates provide short term stability as the homeowners anticipate
a better financial standing in the future. The state of the economy also means
that homeowners get some relief with the adjustable rate mortgage as they wait
for the economy to recover.
Refinancing is not for everyone
It is
important to note that an adjustable rate mortgage may not be favorable in some
situations, for example where the homeowner is looking to stay in the house in
the long haul. You should, therefore, take your time to examine your financial
situation and get a professional to advise you on the additional costs to be
incurred with refinancing and help you determine whether refinancing to an
adjustable rate mortgage will make any economic sense both in the short term
and in the long run.
