subject: Weigh Loan Refinance Interest Rates Arm Versus Frm [print this page] Loan refinance is often motivated by lower interest rate and in turn low payments. But there are lots of other reasons why you might want to refinance. Some may want to consolidate outstanding debt, such as combining a first and second mortgage into a new first mortgage; some may want to tap built-up equity in their homes, and some may just want to get out of a mortgage product that they don't like or they recon is costing more than expected and would like to go from Adjustable Rate Mortgage (ARM) to a fixed rate mortgage (FRM). For instance, you may have a 7/1 ARM 30 year loan and may be wondering if loanrefinance could get you a better rate.
Before that let us first understand what your 7/1 ARM is. A 7/1 adjustable rate mortgage is a stable mix between fixed-rate and an adjustable rate mortgage with all the advantages of low rates and monthly payments for a long period. The 7/1 ARM is usually taken for period of 30 years, with fixed low rate for the first 7 years. Then, the rate will adjust according to some index your lender is using and fully amortize within the remaining 23 years. The adjustable rate is tied to the 1-year treasury index and is added to a pre-determined margin (usually between 2.25-3.0%) to arrive at your new monthly rate.
A common cap structure for a 7/1 adjustable loan will be 5/2/5 or 5/2/6, which means that the first adjustment will be within 5% up or down, the annual adjustment is up to 2% up or down, and the lifetime cap is 5 or 6% up or down. Or you may ask your lender what is the life cap (the maximum rate that your adjustable may climb to) and periodic caps (the maximum percentage that either your rate or payment may change in any given year or specified time period) of your ARM.
Fixed Rate Mortgages (FRMs) hold the same interest rate for the life of the loan.
Now should you choose a FRM or an ARM? On one side, you have predictability with FRM. In the other, you have the potential for savings with ARM. It is usually security versus savings.
Refinance to fixed-rate mortgages is an especially helpful move if you intend on staying in your home for several years or indefinitely. But if you are not sure whether you would keep the current home for more than 7 years or not then ARM can be a better option. It will give you time to decide and at the same time you can take the advantage of low opening that usually go hand in hand with any ARM.
Determine how much you can save by using an online calculator to figure out what the FRM and ARM payments would be. Even if you're fairly certain that you'll be selling in the next few years, you still have to weigh the risk factors. If you have a very low tolerance for risk, an ARM probably isn't for you hence FRM can be a better choice even if you may end up paying more.
Conclusively, Adjustable Rate Mortgages (ARM) are better suited for people who know exactly how much they will have to pay during and after the low opening and who are able to handle the fluctuations in mortgage payments without financial difficulty. They are not recommended for first-time home buyers or borrowers who do not understand how ARMs work.
Hence it is advisable that you evaluate and know thoroughly what you have and how it will change in future and then compare with what will refinance of your loans do to your interest rate and in turn to your monthly payments.
by: Ask Bill
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