Refinancing when interest rates are low can help homeowners achieve financial independence. However, refinancing an adjustable-rate mortgage is not always an ideal option. Before refinancing, homeowners should conduct thorough financial assessments, observe market changes, and consult an experienced advisor.
This brief guide to refinancing an adjustable-rate mortgage in Maryland offers simple guidelines for when to refinance and how to keep the financial benefits of your investment.
What is an Adjustable Rate Mortgage (ARM)?
An adjustable-rate mortgage (ARM) has a variable interest rate. In contrast with fixed-rate mortgages, which maintain their interest rate for the entire loan period, ARMs change at predetermined intervals.
The typical loan process for an adjustable-rate mortgage begins with an introductory period with a lower interest rate. After a pre-set interval (usually 3-10 years), the interest rate will adjust every few months or every year to reflect current market changes.
What are the Benefits of an ARM?
Due to its timed interest rate increases, an ARM offers several benefits. The lower initial interest rate allows homeowners to take advantage of their loan’s timeline, paying less initially and increasing their payments over time.
For example, many homeowners opt for an ARM to use their short-term cash surplus on new furniture or home renovations, loan consolidation, and other pressing matters following their move. Additionally, an ARM can help new homeowners take advantage of low interest rates before flipping the house and passing the adjusted rate to the new owner.
Importantly, there’s no assurance that the initial interest rate will be lower than the secondary rate. Market fluctuations can change how this works depending on your circumstances. This is why it’s so important for homeowners to understand when to refinance.
When to Refinance Your ARM
There are several reasons to refinance an ARM. Doing so will replace your existing mortgage terms, including interest rates, with a new loan. Depending on your needs, the replacement mortgage can be an adjustable-rate or fixed-rate loan.
Here are some of the key reasons why refinancing an ARM might benefit your situation:
- Your Credit Score Has Improved: With a better credit score, you can potentially refinance at a lower interest rate than your current mortgage due to your increased trustworthiness as a borrower.
- Your Financial Goals Have Changed: When you signed the ARM, your short-term goal may have been to afford the house. Now that you’re settled, you may want to consolidate debt, renovate the house, or make other big purchases. A new fixed-rate loan could help.
- Your Timeline Has Changed: Adjustable rate mortgages are often most effective when homeowners plan to sell the house quickly since they can pay the lower initial interest and pass the loan to the next homebuyer before it adjusts. If you plan on staying in the home for at least a few more years, you may want a fixed-rate mortgage for added financial transparency.
- Interest Rates Have Gone Down: If interest rates are low or may soon increase, you may want to switch to a fixed-rate loan to avoid expensive adjustments in the next few years. The market can be difficult to predict, so a seasoned financial advisor can help determine whether refinancing is in your best interests.
The main draw of refinancing an adjustable-rate mortgage is to achieve more financial security. Locking in a fixed rate can help you future-proof your finances against market changes and give you and your family peace of mind.
When Not to Refinance Your ARM
However, many homeowners in Maryland wonder if refinancing an ARM could be the wrong move. There are some fundamental risks to refinancing that you should be aware of before signing a new loan:
Higher Interest: In cases where market prices have increased, your adjusted rate may be higher than the initial estimates. By refinancing, you may secure a lower rate. However, in other cases, the rate on the new loan could be significantly higher.- Closing Costs: Refinancing requires paying the closing costs on your loan. This means that for many homeowners, refinancing will not save them any money, especially in the short term.
- Prepayment Fees: Some adjustable-rate mortgages charge a penalty for prepayments and charge homeowners a fee for refinancing within the first 3-5 years of the loan. The amount varies by lender, but it could be a fixed percentage of the loan principal or 6-12 months of interest.
Contact Woodsboro Bank for Professional Advice on Adjustable-rate Mortgages in Maryland
Refinancing an adjustable-rate mortgage can be advantageous, but many homeowners change their loans without fully considering the financial consequences. An experienced loan advisor can help.
At Woodsboro Bank, our team of financial advisors can evaluate your situation to determine whether refinancing your adjustable-rate mortgage is the right step for your finances. Contact our team today to review your loan and learn more about your options to future-proof your finances in an unpredictable market.