Mortgage Refinancing Against the Tide: When Adjustable Rates Make Sense

A great deal of the refinancing activity of the past year or so has been on the part of people switching from an adjustable rate to a fixed rate mortgage. But when does it make sense to go the other way, and switch to an adjustable rate mortgage? In the current environment this may seem like swimming against the tide, but in certain circumstances it can make sense -- especially for homeowners who have begun to think about selling their homes.


The reason there has been so much interest in switching from adjustable rate to fixed rate mortgages is two-fold. For one thing, interest rates have declined overall since the middle of last year. While an adjustable rate mortgage should capture a decline in interest rates eventually, a fixed rate mortgage represents a way of locking in the lower rate for the remainder of the mortgage.

The other reason why switching out of adjustable rate mortgages has been so popular is, quite frankly, sticker shock. Over the past few years, for a variety of reasons, some adjustable rate mortgage holders have seen their monthly payments go up at times. Although this should have been expected, the element of uncertainty it adds to budgeting has proven unpalatable for many people.

Those reasons for switching to a fixed rate mortgage are understandable, but there are equally rational reasons to switch to an adjustable rate mortgage under some circumstances.

Interest Rate Perspective

One basic reason for choosing an adjustable rate mortgage is that you anticipate that interest rates will fall. This possibility is one reason adjustable rate mortgages exist in the first place. If you anticipate a sustained downward trend in interest rates, then switching to an adjustable rate mortgage would be one way of capturing that trend.

However, be advised that some very wise people have been made to look foolish by trying to guess the direction of interest rates. Also, on a historical basis, current interest rates are relatively low. Past performance would suggest that they are more likely to be higher than lower than current levels.

The Time Frame Factor

If an interest rate perspective is not a certain basis for switching to an adjustable rate mortgage, the time frame you expect to remain in your house may be. If you anticipate moving in a few years, you may be able to take advantage of an adjustable rate mortgage's low teaser rate, while limiting your exposure to subsequent increases in interest rates.

Using a Refinance Calculator to Compare

A refinance calculator can help you determine if you can save money in this way. Use the refinance calculator to compare your total mortgage payments over your expected remaining time in your home, running first your current mortgage arrangement and then an adjustable rate mortgage possibility. Run multiple scenarios for what would happen if interest rates increased, and be sure to factor in any expenses, including any refinancing charges.

Posted By :

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

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