Is ARM refinancing a dumb move these days? Not at allby Tim Manni
Adjustable rate mortgages (ARMs) were blamed by some financial commentators for the rise in foreclosures, so many homeowners are wary of them. Indeed, only 5 percent of mortgage applications at the end of 2010 were for ARMs. While it’s true that ARMs are a bit more complicated than fixed-rate loans, in an environment of rising mortgage rates, ARMs are especially worth a second look if you’re refinancing.
ARMs offer low initial mortgage rates
Most homeowners interested in refinancing are seeking the lowest possible mortgage rate. This is why ARMs–which tend to have lower interest rates than their traditional 30-year, fixed counterparts–are popular when market interest rates are high. In such periods, mortgage borrowers looking to minimize their monthly payments find initial ARM rates quite attractive. With today’s mortgage rates still holding at historical lows, most consumers prefer to lock in a low rate for the long term.
However, many refinancers in today’s market would actually come out ahead if they chose an ARM. This is particularly true now that mortgage rates have begun to climb at the end of 2010.
“The gap has widened between loan types over the past few weeks, with fixed-rate, 30-year loans over 5 percent while 5/1 ARM rates are at 3.6 percent,” says Keith Gumbinger, vice president of HSH.com. “When the differential is greater between the two loan types, it adds to the argument that ARMs are worth considering.”
ARM advantages for refinancing
A big reason to refinance into an ARM is to take immediate advantage of low mortgage rates in the initial fixed-rate period. Another compelling reason to refinance into an ARM is if you plan to sell your home before the loan adjusts.
“If you know the end period when you will sell your home or pay off the loan in full or refinance, an ARM can be a good loan,” says Douglas Benner, a senior loan officer with Embrace Home Loans in Rockville, Md. “Some people know for certain they are retiring to another home within a few years, or they know they will come into some money or be transferred to another area. In that case, it makes sense to save the money in interest payments during the initial few years of the loan.”
Gumbinger says another candidate for an ARM refinance is a homeowner who is waiting for the economy to recover or for their personal financial situation to improve. For this kind of homeowner, an ARM provides valuable short-term stability.
“This can be a great product to ‘tide you over’ for a few years as long as you save money while you are using an ARM,” says Gumbinger. He cautions that this strategy comes with some risk, however. “It is a reasonable guess that mortgage rates will be higher in the future since they are so low now. Even though people have a plan for when the fixed-rate period ends, they should be prepared for the possibility of the plan not working out.”
Be sure to continue reading this article — “Crazy to refi into an ARM? Not at all.” Like what you’ve read? Each week HSH.com publishes new educational articles under the Mortgage News Today section of the website (located at the very top of the homepage).
Also, get ahead of curve by reading our mortgage market outlook for 2011. What will drive the housing market in 2011? Will mortgage rates rise this year? Find out all that and more by reading our 2011 Outlook for Mortgage Rates and the Mortgage Market.