Are recent developments a warning sign for ARMs?

August 24th, 2012

If you have had an adjustable-rate mortgage (ARM) in recent years, you are to be congratulated -- you have ridden mortgage rates down to unprecedented levels. However, recent signals suggest it could be time to consider whether that ride may be over, in which case it would make sense to refinance into a fixed-rate mortgage to lock in today's low rates.

How a refinance calculator can help you plan

After the end of July, 30-year mortgage rates rose for three consecutive weeks, something that had not happened previously in 2012. People with ARMs needn't panic: the rise in rates has yet to affect ARMs in a meaningful way, and in most cases people will have time to act before their next mortgage re-set date. Still, if you have an ARM, there are some preparations you should start to make:

  1. Use a mortgage calculator to determine your ceiling. Even if you aren't ready to bail out on your ARM yet, you should know what your cut-off point is. A mortgage payment calculator can help you determine how high rates would need to go before your monthly payment starts to become unmanageable. You should be prepared to act if rates approach that point so you don't risk your loan becoming unaffordable.

  2. Calculate multiple refinancing scenarios. Use a refinancing calculator to figure out how a shift to either a 30-year or a 15-year loan would affect your payments. A 30-year loan will produce more affordable monthly payments; but with a lower interest rate and shorter term, a 15-year loan means greater savings over the long run. Running both scenarios though a refinancing calculator will help you weigh that trade-off.

  3. Determine if your current home value provides room to refinance. As too many people have discovered in recent years, just because you were approved a few years ago for a loan doesn't mean you would automatically be approved now. Shore up your financial and credit situations to the extent possible, and check to see if the current value of your home comfortably exceeds the amount you'd seek to refinance.

Adjustable-rate mortgages have been a huge win for borrowers in recent years. If you are one of those borrowers, using a refinance calculator can help you lock in that win before you get caught on the wrong side of an interest-rate cycle.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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