Mortgage Refinancing with a 5 or 7 Year ARM
ByMost American homeowners have turned a deaf ear to discussions regarding mortgage refinancing with an adjustable rate. Clearly fixed rate mortgages have surged in popularity in recent years, but they are time when an ARM makes sense. Adjustable rate mortgages (ARM) are a very attractive option for homeowners looking to invest in a home. The interest rate offered on these types of loans are generally significantly less than what you would get on a 30 year fixed rate mortgage. However, the tradeoff is that the interest rate usually changes every year on the anniversary of your loan. This can be quite risky as you won’t know for certain if the interest rate will be higher or lower than your current rate. Even a change of as little as 1% can add hundreds of dollars to your monthly mortgage. Is the monthly savings worth the risk?
Is a 5/1 or 7/1 ARM Too Risky?
It depends on what your long term goals are. Although there are a number of ARMs available, many people consider 5/1 or 7/1 type of ARMs. A 5/1 ARM is fixed for five years and then the rate adjusts every year afterwards until the loan is paid off. The 7/1 ARM is fixed for seven years and then an adjustable rate for the other 23 years. For those that are considering refinancing a home loan, these may be viable options if you are anticipating interest rates will drop by the time the five or seven years have passed. The reality is that there are multiple choices for a fixed rate mortgage refinance with hybrid loans that blend fixed and adjustable rates over the term.
ARM Refinancing May Save You Thousands of Dollars a Year
They are also a good option if you plan on moving or selling your home prior to the mortgage rate becoming adjustable. For example, if you are planning on retiring in a few years and moving to another state, then refinancing at a fixed rate for 5 or 7 years can save you a significant amount of money in interest. As long as you sell your home before the fixed rate term is up, then refinancing your home loan may be worth the time and effort.
How much lower is the 5/1 rate than a 30-year fixed rate? It can be 2% or more less than a fixed rate mortgage which would result in several hundred dollars in savings every month. That is money you can use to pay off more expensive debt, such as credit card, or to put towards your retirement savings. Be aware, though, that refinancing to a 5/1 or a 7/1 does carry some risk. Namely, if you do not sell your home in time, you could get stuck paying a higher interest rate when your fixed rate term ends. Evaluate all of the elements involved in the refinance – interest rate, fees, terms – to ensure you are getting the best deal available. There are more choices today for the fixed 5 and 7 year loans with conventional, jumbo and a FHA mortgage refinance program. This makes selecting a hybrid refinance that much easier.
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