Should You Refinance to an Adjustable Rate Mortgage?

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.