Refinance your ARM to another ARM?

By on April 19, 2021 0

Refinance your ARM to another ARM: it’s a valid strategy

If you have a ARM loan, you probably chose it to save money, and you probably have did to save money. Generally, interest rates for 5/1 ARM are about one percent lower than 30-year fixed rate mortgages.

But if your introductory period ends, you might be concerned about future rate increases. You could avoid them if you refinance your ARM to another ARM.

Check your new rate (June 14, 2021)

Why choose an ARM – again?

You might be panicking about the end of your introductory period with its low fixed rate. And you might be very tempted to “fix and forget” your loan with a new fixed rate mortgage.

You can certainly choose this product, but understand that you will pay the price for it. And the reasons for the choice a new ARM on a fixed loan can be as good today as they were when you got your current home loan.

Open your eyes

Before refinancing your ARM, you should know several things:

  • How long do you expect to keep your loan now?
  • What are your ARM interest rate and the payment likely to be?
  • Are you going to save money by refinancing?
  • Can we sleep at night without a fixed loan?

If the answer to the last question is a categorical ‘no’, go to a lender and get a fixed rate refinancing.

End of the story.

However, if you sleep well and expect to have your house and mortgage for a few more years, you can save a ton, again, with a new 3/1, 5/1, 7/1 or 10. / 1 ARM.

Check your new rate (June 14, 2021)

The index, margin and limits of your ARM

Your first step is to determine what would happen to your ARM if it adjusted today and what it is likely to do in the near future.

To do this, you need to review your loan documents and find the index, margin and limits of your loan.

Suppose you have the popular Fannie Mae 5/1 LIBOR ARM with caps of two percent, a margin of 1.5 percent and a lifetime cap of five percent. Today’s LIBOR is 1.80%, so if your loan was reset today, your new rate would be 3.3%. If your current rate is 3.0%, your increase is only 0.3% and this new rate is valid for another year.

But what about the following years? Here are some more numbers for you.

  • The median 1-year LIBOR over the past 20 years is 1.90%. If your loan were reset to this value, your new rate would be 3.4%.
  • The highest rate your loan could reach the next time it is adjusted is 5.0%, because your adjustment limit is 2%.
  • The highest rate that your loan could achieve during its lifetime is 8.0%, because its lifetime limit is 5%.
  • The Federal Reserve estimates that by the end of 2017, the average 30-year fixed-rate mortgage will reach 4.6% and 15-year fixed mortgage rates will reach 3.8%.

Right now, ARMs just don’t look that scary.

Over the past 20 years, MRAs have worked quite well for their borrowers. Here are the median values ​​of some of the most widely used ARM indexes.

ARM vs fixed breakeven point

Maybe after watching ARM Indices and your own loan documents, you worry less about an impending reset. But if you want to expand your comfort zone a bit, you can always refinance your ARM to a new one while rates are still low.

What are the mortgage rates today?

Current mortgage rates continue to represent very good value and continue to make homeownership very affordable in the United States. Ask your mortgage lender to show you today’s rates for fixed mortgages as well as fixed ARMs for three, five, seven, or ten years.

Check your new rate (June 14, 2021)

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