The Benefits of Refinancing

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Should You Ever Refinance A Fixed-Rate Loan With An Adjustable One?

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If you took out a fixed-rate mortgage before the Great Recession, you may be looking at current mortgage interest rates with a combination of disbelief and envy. In fact, those who purchased in the late 90s and have not refinanced since could be paying nearly twice as much in interest as those purchasing or refinancing today. Even if your current interest rate is just a point or two higher than today's rates, you may be eager to refinance before rates begin to rise again. Could swapping out your stable fixed-rate loan with an adjustable one be a viable option? Read on to learn more about when it may make sense to refinance a fixed-rate loan into an adjustable-rate mortgage (ARM), as well as some situations in which another fixed-rate loan could be the right choice. 

When should you refinance into an ARM?

An ARM differs from a fixed-rate mortgage only in the way the interest is structured. ARMs are available in terms of similar length as fixed-rate mortgages, generally anywhere from 10 to 30 years. However, unlike a fixed-rate mortgage that locks in an interest rate for the life of the loan, an ARM's mortgage rate is tied with the overall markets and may shift up and down after the initial lock period has expired. 

Refinancing from a fixed-rate mortgage into an ARM makes sense in a few situations. One is if your current interest rate is much higher than ARM rates and you're planning to move before the ARM reset period ends. This can allow you to enjoy low mortgage payments until you move while ensuring that more of your money goes toward principal (and creates equity) rather than simply paying interest. An ARM can also make sense if you suspect future interest rates will remain low, or if you have the funds to pay off the mortgage in full if the interest rate rises in the future.

Is refinancing into another fixed-rate loan to lower your interest rate a better choice? 

In some cases, particularly for those who haven't yet refinanced to take advantage of today's low mortgage rates, swapping out your existing 15- or 30-year fixed-rate mortgage for a new, lower-interest one may be the best choice. If you're planning to stay in your home for the foreseeable future or appreciate the predictability of fixed principal and interest payments, a fixed-rate loan can help. And for those who don't have stellar credit, counting on being able to refinance into a lower-interest fixed-rate loan after your ARM lock period ends could be risky.