Why an ARM May Save You Money When Refinancing
When refinancing your mortgage, you have the option to choose between a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM). While an FRM offers peace of mind with a steady, unchanging interest rate, an ARM may actually save you money in certain situations.
What is an ARM?
An ARM is a type of mortgage in which the interest rate can change over the life of the loan. The initial interest rate is typically lower than that of an FRM, but can adjust up or down depending on market conditions. Most ARMs have a fixed rate for a certain number of years, commonly 5 or 7, before the rate is allowed to change on an annual basis.
There are several types of ARMs, including hybrid ARMs which combine features of both FRMs and ARMs, and interest-only ARMs which allow the borrower to only pay the interest portion of the loan for a set period of time.
Why Might an ARM be a Good Choice for Refinancing?
One of the main benefits of an ARM is that the initial interest rate is typically lower than that of an FRM. This can save you money on your monthly mortgage payments, especially if you plan on selling the property or refinancing again before the rate has a chance to adjust.
If you plan on living in the property long-term, an ARM may still be a good choice if you believe that interest rates will remain low or even decrease over time. This is because the interest rate on an ARM can potentially adjust down, which would save you money on your monthly payments.
Additionally, if you have a large sum of money coming in the near future, such as an inheritance or a bonus, you may be able to pay off or refinance the loan before the rate adjusts. This can save you even more money in the long run.
What are the Risks of Choosing an ARM?
There are certainly risks associated with choosing an ARM over an FRM. The biggest risk is that the interest rate on the loan can adjust up, potentially increasing your monthly mortgage payments to a level that you may not be able to afford.
If you plan on living in the property long-term but believe that interest rates will increase over time, an FRM may be a better choice for you. This will provide you with the peace of mind of knowing that your interest rate and monthly payments will never increase.
It's also important to consider the possibility of your financial situation changing over time. If you believe that you may not be able to afford higher monthly payments if the interest rate on your ARM adjusts up, an FRM may be a more responsible choice.
Final Thoughts
Choosing between an ARM and an FRM can be a difficult decision when refinancing your mortgage. While an ARM can save you money in the short-term, it's important to consider the potential risks and the possibility of your financial situation changing over the life of the loan.
If you're unsure about which option is best for you, it's always a good idea to speak with a mortgage professional who can provide you with personalized advice based on your unique financial situation.