The Benefits of Refinancing to an Adjustable-Rate Mortgage
Refinancing a mortgage can be a smart move for homeowners who want to lower their monthly payments or save money on interest. One option to consider is refinancing to an adjustable-rate mortgage (ARM). Unlike a fixed-rate mortgage, an ARM's interest rate can fluctuate over time, which can be both a benefit and a risk. However, for the right borrower, an ARM can offer several key advantages that make it a wise choice.
Lower Initial Interest Rate
One of the biggest benefits of an ARM is that it typically offers a lower initial interest rate than a fixed-rate mortgage. This can be especially attractive to borrowers who are looking to save money on their monthly payments. With a lower interest rate, borrowers will pay less in interest over the life of the loan, which can translate into significant savings.
Keep in mind, however, that the initial interest rate on an ARM is often lower because it is only fixed for a certain period of time, usually between one and 10 years. After that, the interest rate can adjust annually based on market fluctuations. While this can be a risk, borrowers who plan to sell their home or refinance again in the near future may be able to take advantage of the lower rate without facing much risk.
Flexibility
Another advantage of an ARM is its flexibility. Fixed-rate mortgages generally have a set monthly payment that stays the same over the life of the loan. With an ARM, however, the payment can adjust periodically based on the interest rate. This can be beneficial for borrowers who may experience fluctuations in their income over time.
For example, if your income increases, you may be able to afford a higher monthly payment. With an ARM, you can adjust your payment as needed to reflect your current financial situation. Alternatively, if your income decreases, you may be able to reduce your payment to better accommodate your budget.
Ability to Pay Off Your Mortgage Faster
For some borrowers, an ARM can be a tool that helps them pay off their mortgage faster. If the interest rate on an ARM decreases or stays the same over time, borrowers can take advantage of the lower payments and use the savings to make additional payments towards the principal of the loan.
Keep in mind, however, that this strategy requires discipline and careful planning. Borrowers who are considering this approach should make sure that they can afford the higher payment if the interest rate on the ARM increases in the future.
Take Advantage of Improving Credit
If you've been working hard to improve your credit score, refinancing to an ARM can help you take advantage of your efforts. As your credit score improves, you may qualify for a better interest rate than the one you currently have on your fixed-rate mortgage.
With an ARM, you can refinance to take advantage of the new rate. This can save you money on interest over the life of the loan, and help you pay off your mortgage faster. In addition, refinancing to an ARM can allow you to change the terms of your loan, such as the length of the loan or the amount of the monthly payment, to better align with your current financial situation.
The Bottom Line
Refinancing to an adjustable-rate mortgage can be a smart move for some borrowers. With a lower initial interest rate, flexibility, the ability to pay off your mortgage faster, and the opportunity to take advantage of improving credit, an ARM can offer several key benefits over a fixed-rate mortgage. As with any financial decision, it's important to carefully weigh the pros and cons before making a final decision.