Chances are you weighed the pros and cons of an adjustable rate mortgage when you first purchased your home. If you decided to obtain an adjustable rate mortgage and your initial rate period is about to end, you may want to decide whether or not to refinance into a fixed-rate mortgage or continue with your current mortgage.
Not all adjustable rate mortgages (ARMs) are the same. The terms can vary greatly. Some ARMs can adjust as frequently as every six months while others can have only one adjustment in 15 years. Two of the more popular ARMs are the 5/1 and 7/1. The 5/1 ARM has its first adjustment after five years then adjusts annually. The 7/1 ARM has its first adjustment after 7 years and then adjusts annually.
Adjustable rate mortgages make sense when you are looking for a short term loan. Perhaps you know that you are not going to stay in your current home for more than five years because you are planning on moving to another location. Perhaps this is a starter home and you wish to upgrade within the next five years. Whatever your reason, once the fixed rate initial period ends, your mortgage payment may be different. There are so many factors that can cause mortgage interest rates to rise and fall which in turn, will impact your mortgage payment once the rate adjusts. Even factors such as oil prices, the presidential election or the infamous Brexit can have dramatic impacts on mortgage rates just like it did last year.
What aspects should you consider?
- Does your monthly mortgage payment make financial sense for you presently? Considering rates are currently still low, they are likely to go up rather than down. If your rate goes up, can you still afford your monthly payments or will this pose a burden on your budget?
- What are the current mortgage rates? How has the market been lately? Are rates rising? Are they steady? Have they dropped recently? Keeping an eye on the market when your fixed rate is about to expire may help you determine if your rate is likely to increase.
- Is there an interest rate cap on your current ARM? If so, this may help limit how high your rate could rise. Review the terms of your mortgage to determine the interest rate cap that may be in place on your loan.
- What would your new payment be if your rate increases? Using a mortgage calculator, determine what your new payment amount could be, given possible interest rate increases. Once you have calculated these new numbers, you can best evaluate how your new payment amount will affect your monthly budget.
The answers to these questions should help you determine whether or not you should keep your adjustable rate mortgage. Are you are planning on staying in your home longer than originally anticipated? If so, a fixed-rate mortgage may help you sleep better at night. Only you know what is best for your circumstances. Be sure to consider every available option before you decide.
If you would like to speak to a lender to help determine if you should keep your adjustable rate mortgage, talk to the lending experts at Lenox/WesLend Financial or call 844-225-3669. As heard on the radio, it’s the biggest no-brainer in the history of mankind.