Time to refi ARM to a fixed-rate mortgage?


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Dear Dr. Don,
Does it make sense to refinance into a fixed-rate mortgage from an adjustable-rate mortgage? My current home loan has 20 years remaining. I’m being urged to go back to a 30-year fixed-rate loan and pay down $36,000 in debt with a cash-out refinancing. Would this be a smart thing to do?

Thank you,
— Karen Credit

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Dear Karen,
A lot of adjustable-rate mortgage holders are looking at low fixed mortgage rates and wondering if they should refinance. Many have been moving forward with new loan applications.

One key factor is how long you plan to stay in the home. The longer you plan to stay, the more likely it is that refinancing into a fixed-rate loan makes sense. With variable rates, there’s a risk that you’ll get socked with higher costs in the future.

Using a cash-out refinance to pay off other debts consolidates your debt into a single payment at a low interest rate. It should reduce your monthly payment and will typically generate an increased mortgage interest deduction on your taxes.

What’s the downside of using equity in your home to restructure your debts? You’re using your home as collateral to finance your past spending. By taking 15 to 30 years to pay off the debt, you may increase the total interest expense you’ll pay on that debt. Have you been living within your means? If freeing up credit lines on your credit cards tempts you to run up the balances all over again, you’ll be facing a similar problem with debt in the future.

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