Why Consider Hybrid ARM Refinancing in a Low-Rate Environment?

March 11th, 2010

If you are considering a mortgage refinance now, you’re probably trying to take advantage of low interest rates. Would it make sense for you to consider saving thousands more dollars for the same loan cost?

With current mortgage rates low for all mortgage types, including traditional fixed-rate home loans, many homeowners filing loan applications for mortgage refinances are not giving any consideration to any of the available adjustable-rate mortgages (ARMs) in the market.

Depending on your circumstances, you may increase the benefits of a mortgage refinance with an ARM or a hybrid ARM. How do you go about determining if this is the right choice?

Low Interest Rate and Monthly Mortgage Payment

A hybrid ARM is a loan that has its initial rate fixed for 3, 5, 7, or 10 years, after which the rate can adjust annually. Hybrid ARMs offer a significantly lower interest rate than the standard 30-year fixed-rate mortgage. As a result of the low interest rate, you can pay a much lower monthly mortgage payment.

For example, if you currently have a $300,000 mortgage balance to refinance, at a fixed rate of 4.75%, your monthly principal and interest is approximately $1,565 per month. Depending on where you are located, you can find a 5/1 ARM with a mortgage rate as low as 3.5% (monthly payment of $1,345), a 7/1 ARM at 3.75% (monthly payment of $1,390), or a 10/1 ARM at 4.25% (monthly payment of $1,475).

If you chose one of these hybrid ARM options, you would save between $11,000 and $13,000 during the initial fixed-rate period before the loan converts to an adjustable-rate mortgage. Use a loan comparison mortgage calculator to see how much your savings can be when refinancing to a fixed-rate mortgage versus a hybrid ARM mortgage in its initial fixed-rate period.

Refinancing While Anticipating Changing Circumstances

Are you currently in a job that has seen overtime and/or bonus restricted or taken away until the economy improves? Taking advantage of the low interest rate of a hybrid ARM will allow you to ease your current financial burden with the lower monthly payment; when your income improves, you can increase your monthly mortgage payment to accelerate principal reduction. An amortization calculator can assist you in determining how increased principal payments can affect your mortgage balance.

Are you fairly certain you will not be in your current home in the next 6, 8, or 11 years? If so, why pay more in interest for a 30-year fixed home loan? Take advantage of the low interest rate and savings you can generate with a hybrid ARM mortgage refinance.

Do you anticipate any significant change in your financial situation in the next several years that would include a large sum of money, an increase in salary or income (say you or your spouse will be going back to work after finishing degree), or moving to a new home? These factors will affect your mortgage refinance choice of a fixed-rate mortgage or an adjustable-rate mortgage.

Plan for the Future

Of course, there’s a reason why many homeowners refinance to a 30-year fixed-rate mortgage. It’s still the safest and most common mortgage–with this type of home loan, you will always know what your monthly payment will be. If you are considering some type of adjustable-rate mortgage for a mortgage refinance or a new home purchase, also consider what will occur when the fixed-rate period of the loan expires and it converts to an adjustable-rate mortgage. Plan on your mortgage rate and monthly payment increasing. A way to mitigate a potential rate increase is to use some of the savings from the fixed period and apply it against your principal. That way, you’ll blunt the increase of your monthly payment even if mortgage rates have risen.

If you are able to accomplish this or you are very certain you will be out of the home and the mortgage before it becomes an adjustable-rate mortgage, then your refinance is a strong candidate for a hybrid ARM.

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