Why an ARM Could Be a Smart Choice for Your Refinancing Goals
If you're looking to refinance your mortgage, you may be wondering if an adjustable-rate mortgage (ARM) is the right choice for your financial goals. While ARMs have gained a reputation for being risky, they can actually be a smart choice for certain borrowers. Here's what you need to know about ARMs and how they can benefit your refinancing goals.
What is an ARM?
An ARM is a type of mortgage where the interest rate can change over time. With a traditional fixed-rate mortgage, the interest rate stays the same throughout the life of the loan. But with an ARM, the interest rate is tied to a specific index, such as the London Interbank Offered Rate (LIBOR), and can change periodically based on fluctuations in that index. ARMs typically have a lower starting interest rate than fixed-rate mortgages, but the rate can increase over time, which makes them riskier.
Why choose an ARM for refinancing?
There are several reasons why an ARM may be a good choice for refinancing:
- Lower interest rate: ARMs often have lower interest rates than fixed-rate mortgages, which means you may be able to save money on your monthly mortgage payments.
- Shorter loan term: ARMs typically have shorter loan terms than fixed-rate mortgages. If you're planning to sell your home in the near future, an ARM with a shorter term may be a smart choice.
- Flexibility: ARMs offer more flexibility than fixed-rate mortgages. If you're planning to pay off your mortgage early or want to take advantage of lower interest rates in the future, an ARM may be a good option.
What are the risks of an ARM?
While ARMs have their benefits, they also come with risks. Here are a few things to keep in mind:
- Interest rate increase: The biggest risk of an ARM is that the interest rate can increase over time, which means your monthly mortgage payments could also increase. Make sure you understand how much your payments could go up and whether you can afford them.
- Adjustment periods: ARMs typically have adjustment periods, which is the length of time between interest rate changes. Make sure you understand how often your rate can change and whether there are any limits on how much it can change.
- Market fluctuations: If the index your ARM is tied to experiences steep or unexpected fluctuations, your interest rate could skyrocket or plunge, which could impact your ability to repay your loan.
Is an ARM right for you?
Whether an ARM is right for you depends on your financial goals and risk tolerance. If you're looking to save money on your monthly payments and plan to sell your home in the near future, an ARM may be a smart choice. However, if you're planning to stay in your home for a long time and want more stability in your mortgage payments, a fixed-rate mortgage may be a better option.
Ultimately, the decision to choose an ARM or a fixed-rate mortgage for your refinancing goals comes down to your personal financial situation and goals. Make sure you do your research, consider your options, and consult with a trusted mortgage professional to help you make the best decision for your needs.