How to Time Your Refinance with an Adjustable-Rate Mortgage
If you have an adjustable-rate mortgage (ARM), you may be wondering about the best time to refinance. Refinancing can be a great way to lower your interest rate and monthly payments, but doing it at the wrong time could cost you more in the long run. In this article, we’ll explore the factors to consider and strategies to help you time your refinance wisely.
Understanding ARM Loans
Before we dive into refinancing, let’s review the basics of ARM loans. Unlike fixed-rate mortgages, ARMs have interest rates that can change over time. Typically, they start with a fixed rate for a set period, such as five years, and then adjust annually based on market conditions. These adjustments can cause your monthly payments to increase or decrease.
The advantage of an ARM loan is that you may be able to get a lower interest rate initially. This can make it easier to qualify for a mortgage, and you could save money on interest over the first few years. However, if interest rates rise, your payments could become unaffordable.
Considering Refinancing
Whether you should refinance an ARM loan depends on several factors, including the current interest rate environment, your credit score and financial situation, and your long-term goals. Here are some reasons you might want to refinance:
- You want to lower your monthly payments.
- You want to switch from an ARM loan to a fixed-rate mortgage to have more predictability in your payments.
- You want to pay off your mortgage faster by shortening the term of your loan.
- You want to tap into your home equity to finance home improvements or other expenses.
Keep in mind that refinancing comes with costs, such as closing fees and appraisal fees. These can add up to several thousand dollars, so you’ll want to make sure that the savings you’ll get through refinancing will be worth the expense.
Timing Your Refinance
When you have an ARM loan, timing your refinance is critical. You don’t want to wait until your payments become unaffordable, but you also don’t want to refinance too early and miss out on potential savings. Here are some strategies to help you time your refinance:
- Watch interest rates. Track trends in interest rates to determine whether they’re rising or falling. If rates are falling, you may want to wait to see how low they’ll go before refinancing. If rates are rising, you may want to refinance sooner rather than later to lock in a lower rate.
- Look at your payment history. If your payments have been consistently affordable, you may not need to rush to refinance. However, if you’ve had to make some adjustments to your budget to keep up with payments, it may be time to explore refinancing options.
- Consider your plans for the future. If you’re planning to move in the near future, refinancing may not be worth the cost. However, if you plan to stay in your home for several years, refinancing could help you save money in the long run.
- Review your credit score. If your credit score has improved since you took out your ARM loan, you may be able to qualify for a better interest rate. This could make refinancing more affordable and beneficial.
- Talk to a mortgage professional. A mortgage professional can help you assess your options and determine whether refinancing is right for you. They can also help you understand the costs and potential savings.
Conclusion
Refinancing an ARM loan can be a smart move, but it’s important to time it right. By considering factors such as interest rates, your payment history, and your long-term goals, you can make an informed decision about whether to refinance. Talk to a mortgage professional for guidance on the best approach for your situation.