Adjustable Rate Mortgage vs. 30 Yr. Fixed: When Should I Refinance and What Loan Should I Get

With today's cooling housing market and increasing interests rates, people want to refinance their home into a fixed rate by getting into a 30 year fixed. A lot of adjustable rate mortgages (ARM) are about to expire from the last refianace boon and they are questioning what loan product will better for them. They are also asking when it be the right time for them to refinance. As a Mortgage Consultant, I am going to help answer that question and give you some advise so you can make an informed decision.

Before we go on to decide what is the best option for you, let's discuss a little about an ARM to see what it is how it works. We are going to focus on the ARM that allows you to pay principal and interest with your payment. All of us understand that an ARM is a loan product that allows the interest rate to adjust every month, six months, or 12 months. The ARM has a fixed period where the rate won't move. The fixed period is usually around 2 Yr., 3 Yr., 5 Yr., 7 Yr., and/or 10 Yr. The interest rate on the ARM is usually lower than a fixed interest rate, because as soon as it adjusts the lender will make a higher return on their investment. Since the rate will adjust after the fixed period, the borrower will increase or decrease their mortgage payments as the rate adjusts to current market rate trends. The lender usually has a margin on top if the index rate that they are lending with. The most popular interst interest rate they use is the London Inter Bank Offered Rate (LIBOR). Most banks have a 2.25% margin on top the index rate. For example, let's say that the LIBOR is a 5.375% right now and the margin is at 2.25%, you will paying 7.625% on the loan amount owed.

Those borrowers who got an ARM when they purchased or refinanced want to know when it would be the best time to refiance. First, you have to determine when your fixed period on your ARM is about to expire. Let say you refinanced 9/25/2004 with a 2 Yr. ARM, your fixed rate expires on 9/25/2006. You want to refinance before that date. However, you also have to take into consideration is if you have a prepayment penalty (PPP). This will give you an idea when you could refinance without having to pay back six months worth of interest. Most PPP are two years, which coincide with the 2 Yr. ARM. However, don't be to certain that just because you have a 2 yr ARM you will have a 2 yr. PPP.  There are some lenders who wanted to qualify you for a lower rate, than what you actually qualified for, will give a longer PPP. For example, with 2 Yr. PPP with a 2 Yr. ARM, they will give a 3 Yr. PPP. If you need help figuring out how long is your PPP you have to check on the Rate Rider form you signed when you signed your loan documents. Once you have determined those two issues that have been discussed, you might want to do it before the fixed period expires. I would recommend a month before.

When people actually do refinance they want to get into a 30 Yr. Fixed product. The 30 Yr. Fixed is loan product that will not allow the interest to change through out the whole life of the loan. It is a very conservative loan product that is designed for those individual who just want to pay off their loan. However, is the 30 Yr. Fixed that right loan for everyone? Most certainly not. Every borrower is unique in its nature so different people require an ARM or a 30 yr. Fixed. If you are the type of individual that likes to refinance often then an ARM would be right for you. If you are trying to pay off debt and increase your FICO score, then an ARM will best for you. If you purchased a home and plan to keep it for a short period of time then an ARM will best for you. If you never want to refinance your or touch your home, for that matter, then a 30 Yr. Fixed will be better for you.

I hope these helpful tips, I provided you, will help with your next refinance. I wish good luck!

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