Did you know that you don’t have to refinance into a fixed-rate loan when you refinance? Just like the ARM loan was an option when you bought the home, it’s an option again when you refinance. Should you choose the ARM loan, though? We give you some things to think about when deciding below.
What are Your Plans?
First, consider your plans. Is this your ‘forever home’? If so, you may want to lock in a fixed-rate so that you have some stability. If you choose the ARM, you’ll have to deal with the adjusting rate. You obviously have the option to refinance out of the ARM if you want, but then you are paying closing costs for yet another refinance.
If it’s not your ‘forever home,’ when will you move? Will it be before the rate might adjust? If you will move before the adjustment date, the ARM could save you money. Typically, when you get an ARM, you get a low introductory rate. Let’s say you have that rate for 5 years, but you’ll move in 3 years. This means that for those 3 years, you’ll save money on interest. If you sell the home before the rate adjusts, you come out ahead of the game.
What’s the Difference?
It’s important to get a quote for both types of loans from any lenders that you apply with for a refinance loan. This way you’ll be able to make an informed decision. Just knowing that you could get a ‘lower rate’ if you chose the ARM rate isn’t enough. You need to know how much you’ll save.
The best way to do this is to compare the fixed rate loan to the ARM. For example:
Your lender offers you a 5.5% fixed rate and a 4.85% ARM rate on a $200,000 loan. The fixed rate payment would be $1,136 per month and the ARM payment would be $1,058. That’s a $78 savings per month. If the ARM is fixed for 5 years, that’s $4,680 savings over the five years. That could cover a majority of your closing costs, but then you are at the mercy of the adjusting rate.
You can then use this information to decide if the ARM makes sense. Obviously, the more money you’ll save taking the ARM, the more likely you will be to choose it. Don’t let the savings be your only deciding factor, though. If this is your forever home, you really have to decide how you will proceed. Is it worth it to pay for another refinance down the road should rates increase again? This could render your saving useless by taking the ARM this time around.
Do You Need the ARM?
Another question you should ask yourself is if you need the ARM. Is it necessary in order for you to qualify? Maybe you have a slightly elevated debt ratio and the fixed rate loan puts you over the edge. If that’s the case, you may need the ARM loan just to get qualified.
Also, think about whether you really need to refinance. Is it vital to your finances? What are you trying to achieve with the refinance? Do you want to save money on your monthly payment, get a lower interest rate, or take money out of your home’s equity? The goal of the refinance will also help you decide if the ARM loan is right for you.
ARM loans aren’t for everyone, but they definitely have their benefits that some people enjoy when refinancing. Talk to your lender about all of your options so that you know what to expect when you face your options while refinancing.