April 18, 2017
Consumers can choose between and adjustable rate mortgage,
or ARM, or a fixed rate loan. Fixed rates offer long term stability while
adjustable rate mortgages offer lower initial start rates, which is why many
borrowers select an adjustable rate loan. However, the initial rate for
adjustable rate mortgages is sometimes referred to as a “teaser” which is set
artificially low in order to attract a borrower. Or, the loan program is of the
hybrid type which is an adjustable rate mortgage which keeps the initial rate
fixed for a predetermined period of time, say for 3, 5, 7 or even 10 years.
Hybrid start rates are also lower than fixed. But because adjustable rates do
in fact adjust, as interest rates rise so too will the individual borrower’s
mortgage rate rise as well.
To keep rates from adjusting too high over time, interest
rate caps are put in place limiting how
high the rate can ever be by as much a five or six percent above the start
rate. If you started at 3.50% and the lifetime cap is 6.00%, in theory your
rate can go as high as 9.50%. The Fed has predicted it will continue to raise
rates in the future and have indicated rates could go as high as 0.75% over
what they are today. If you have an adjustable rate loan, should you think
about refinancing into a fixed rate?
That depends upon how long you intend to hold onto the
current property. If you intend to sell the home and pay off the existing
mortgage it probably doesn’t make much sense to refinance into a fixed due to
the number of closing costs associated with getting a mortgage.
However, if you do intend to stay where you are for quite
some time and you have an ARM it might be a good idea to refinance out of an
ARM and into a fixed to avoid the possibility of interest rates going much
higher. Yes, you may have a slightly higher rate now with your existing
variable rate loan, but you need to consider what might happen in the future.
For more information or questions about mortgage loans, please call (855) 757-8748.