Use a Refinance Calculator: Assess Adjustable Rate Mortgage Risks

By Richard Barrington
Calculators for Mortgages Columnist

Email this Article | Format for printing

Don't Wait for Trouble before Refinancing

Not everyone with an adjustable rate mortgage has run into trouble over    the past couple years. So, if your mortgage hasn't been a problem up to this    point, why should you consider refinancing? The reason is that the worst    time to refinance is after trouble has cropped up. If you had good credit,    chose a mortgage where the interest rate could fluctuate but without "balloon" features,    and budgeted responsibly for making payments after the "teaser rate" gave    out, you may be wondering what all the fuss is about adjustable rate mortgages.    After all, mortgage interest rates have trended mildly lower over the past    year. Even so, there are reasons you should consider refinancing to a fixed    rate mortgage   

Potential Trouble with Adjustable Rate Mortgages

There are two important reasons why you should consider refinancing to a fixed  rate mortgage when your mortgage situation seems good:

 
• Adjustable rate mortgages will always be vulnerable to changes in interest    rates. The kicker is that if interest rates rise, refinancing to a fixed    rate mortgage will no longer be helpful, since those rates will be higher    as well. At around 6%, thirty-year mortgage rates are relatively low, and    a move to a fixed rate mortgage could lock in your rate at that level.
 
• As a general rule, it is always best to refinance before trouble hits because    that is when your credit as at its strongest. If rising interest rates or    other financial setbacks damage your credit rating, you will find yourself    facing refinancing on much less favorable terms.

Stress-Test Your Adjustable Rate Mortgage

A mortgage    refinance calculator is an excellent tool for helping you evaluate your    refinance options.

    First: Stress-test your adjustable rate mortgage. This means using  the refinance calculator to run a few different scenarios for what could happen  to your monthly payments. For example, suppose interest rates rose 1%, 2%,  3%, or even 4%? As unlikely as it may seem, even larger jumps in interest rates  have been known to occur -- especially over the course of a thirty-year mortgage.  Your mortgage may have caps on how much the rate can change, but these typically  only limit the changes within one year. You could still face years of steadily  rising interest rates.

Second: you can use the refinance calculator to see what payments would  be on a fixed rate mortgage at today's rates. If those are payments your budget  can live with, you may decide it is better to lock in payments at that level  rather than risk having payments get out of control if interest rates rise  at any time in the future.

 

Evaluate Your Adjustable Rate

Adjustable rate mortgages are an appropriate fit for some situations, but  they do come with an "X" factor in the form of potentially rising interest  rates. If you decide you aren't comfortable with such an "X" factor in your  finances, use a refinance  calculator to look at your alternatives.



About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.