Even with today’s historically low mortgage rates, many homeowners with Interest-Only or Adjustable Rate Mortgages (ARMs) are deciding not to refinance. Why? Because their monthly mortgage payments may stay the same or even go up slightly. So why refinance if your mortgage payment doesn’t drop?
Use the following advice and a free loan comparison calculator to evaluate potential long-term savings if you refinance to a low fixed rate mortgage today.
ARM Payment Is Not Fixed
Unless you have a fixed rate, fully amortizing mortgage, your monthly mortgage payment is not fixed through the life of the loan.
Many homeowners with ARMs are enjoying very low rates for now, as the short-term rates upon which ARMs are based remain below 2%, and even many fully-indexed rates remain in the low three percent range. This extremely low interest rate is temporary, however: At some point in the future, the index upon which your ARM rate is based will increase. When that happens, how high will your mortgage payment climb?
See how potential rate changes may affect your future payments by using a free mortgage payment calculator, and comparing your current-rate scenario with various increases.
Interest-Only Payments Increase Too
If you have an interest-only mortgage, you must remember that interest-only payments won’t last forever.
If your interest-only loan is a 30 year fixed rate mortgage, after 10 years your loan will reset and become fully amortizing for the remaining 20 years of the mortgage. In fact, not only will your payments increase during this period due to amortization–they will actually be significantly higher than if you had taken a 30-year mortgage to begin with. This is because a 30-year mortgage would have given you 50% more time to pay the loan off.
When this reset occurs your mortgage payment will increase dramatically. Use a free mortgage payment calculator to estimate how high your mortgage payment may climb when the interest only period expires. Just input your current mortgage balance and interest rate, and an amortization period of 20 years.
Principal Reduction For Free?
What if someone offered a program to you where you could put aside several hundred dollars a month without costing you a dime. Sounds like a good offer doesn’t it?
Well that is essentially what converting from an interest-only payment to a fully amortized fixed rate mortgage payment does. Many homeowners who obtained interest-only mortgages several years ago find they can refinance today to a 30-year fixed rate mortgage at little or no out-of-pocket cost. Even though their monthly payment will ikely change very little, if at all, they are now “saving” hundreds of dollars monthly by paying down their principal balance.
Calculating Potential Equity Accumulation
Use a free mortgage amortization calculator to see how much principal reduction (“equity savings”) you can accumulate with a fully amortized mortgage compared to your current interest-only mortgage.
After entering your original mortgage balance, interest rate, and the 30-year term, click “View Amortization.” A pop-up chart will appear showing how much of your monthly payment will go to principal reduction. Just add up the monthly principal payment amounts through your remaining interest-only period: That’s how much more equity you will have accrued in the interim by converting to a fixed-rate loan now.
Does Refinancing Make Sense For You?
Mortgage refinances are not just about payment reduction or pulling out equity to consolidate other debt. Sometimes mortgage refinances are about restructuring your mortgage today–in spite of temporary inconvenience such as a slightly higher payment–to guarantee lower payments and interest rates in the future than what your current mortgage may provide.
If you currently have an ARM, interest-only mortgage, or any other mortgage with a rate adjustment or payment change in the future, see how today’s low mortgage rates can benefit you. Take advantage of free mortgage calculators to determine how your future adjustments may affect you–and the potential benefit of refinancing your mortgage.
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years’ experience in the mortgage industry
