refinance

Adjustable rate mortgage for refinance?

Highlights
  • Adjustable-rate mortgages make sense for homeowners who plan to move.
  • Borrowers must be prepared for possibility of rising payments.
  • Low rates make fixed-rate loan best option for many borrowers.

Low mortgages rates have brought on a rush to refinance. While many homeowners opt to lock in a fixed-rate loan, adjustable-rate mortgages still can make sense for others.

"Under limited circumstances, an ARM can make sense," says Brent Mendelson, a senior loan officer with Choice Finance in Rockville, Md.

Jean Badciong, chief operating officer of Inlanta Mortgage in Waukesha, Wis., says ARM loans are specifically designed for borrowers who intend to stay in their homes for 15 years or less.

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ARMs typically allow these borrowers to take advantage of lower rates. ARMs are especially good for borrowers who can use the initial fixed period of the loan to pay off the mortgage through extra principal payments, Badciong says.

"Of course, the risks associated with an ARM loan resetting if not paid in full at the end of the fixed term must be considered," he says.

Best candidates

Good candidates for ARMs include borrowers who are sure they can handle any monthly payment increase that might occur down the road should interest rates rise, says Jay Dacey, a mortgage broker with MN Refinancing.com in Minneapolis.

Dacey says he recently refinanced a client's seven-year ARM with five years remaining into a new five-year ARM, lowering the interest rate from 5 percent to 4 percent with no closing costs.

"The ARM makes sense because the borrower is a doctor in residency who will be able to afford any increase in payment if that time comes," Dacey says. "In the meantime, he will enjoy substantial savings and principal reduction compared to a fixed-rate mortgage during the next five years."

To take maximum advantage of an ARM, it's important to balance the reward of a low rate today with the risk of a rising rates tomorrow. A little extra caution can go a long way, Mendelson says.

"If someone will be in the home for three to five years, I would recommend that they look at a seven-year ARM, just because it is always hard to predict the future with accuracy," he says.

Fixed-rate advantages

Although ARMs are often a cheaper way to borrow, fixed-rate loans offer several other advantages.

Tim Ross, president of Ross Mortgage Corp. in Royal Oak, Mich., says the safety and security of a fixed-rate mortgage may make it a better bet when there is only a small difference in the interest rate between a fixed-rate loan and an ARM.

"Choosing an ARM is a personal decision which some people make if they need to get to as low a point as possible for their monthly mortgage payment," Ross says.

Meanwhile, Mendelson says fixed-rate loans are often better for borrowers who are thinking of using their property as a rental, either now or in the future. 

"The buyers may not want to stay in the property more than five years, but they should consider the option of keeping it and renting it later on instead of selling, in which case they would be better off with a fixed-rate loan," Mendelson says.

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