Initial Steps for Refinancing ARM Mortgages
When you’re buying a home, whether or not it’s a first home, it’s easy to let your excitement over the purchase cloud the financial details. Yes, you know how much your down payment is and what your monthly payments will be, yet the interest rate terms can be difficult to fully understand. For a period, mortgage lenders loved offering adjustable rate mortgages (ARM) because of the lower rates provided to borrowers. While an ARM is a valid option for many families, it is not a mortgage you can forget about after the loan closing. In fact, ARM refinances are common across the mortgage industry.
Understanding Your ARM
An adjustable rate mortgage is exactly what it sounds like: a home loan with an interest rate that increases and decreases based on the prevailing rates at the time. This is an attractive product for lenders because they do not shoulder the uncertainty of a rising interest rate environment alone as they would with a conventional fixed rate mortgage. Borrowers like the option because additional interest rate risk often means a lower initial interest rate for you.
The term of your ARM is still the same 15 or 30 years you might expect from a traditional mortgage; however, you also have a period where your lender locks in your interest rate. Typically, lenders lock ARM rates for five or seven years, but you can find three or even 10-year lock periods if you look hard enough. After the lock expires, you rate is variable and will adjust based on the terms of your contract – usually on an annual basis. This is the primary disadvantage of an ARM because rising rates mean higher payment that may not fit into your household budget.
Learning about Mortgage Options
Lenders often recommend you refinance your adjustable rate mortgage once the rate expires. If you decide to follow this advice, choosing a mortgage option with a fixed rate of interest will give you peace of mind and enhanced financial security. On the other hand, you must pay new application, closing and, sometimes, new appraisal fees.
The good thing about refinancing is that you have a wide variety of options. The bad thing is also that you have a wide variety of options. Too many choices can make it difficult to decide what’s best for you.
A conventional mortgage usually offers terms of 15 or 30 years, though some borrowers opt for the less popular 20-year option because they’re already made five to seven years worth of mortgage payments. Your interest rate is typically higher than it was with your ARM. This is offset by a fixed interest rate with payments you know will always be the same.
You can also opt for another adjustable rate mortgage. No matter what your lender says, skip this option if you hate the idea of refinancing your mortgage every few years. If, however, you plan to be in the home less than 10 year, the potential interest rate uncertainty won’t be an issue for you.
Applying for a Refinance
Applying for an adjustable rate mortgage refinance is very similar to the process you underwent to get the mortgage in the first place. Your first step is always to check your credit history. Blemishes on your credit are not always critical, but work to pay any delinquent accounts and correct erroneous information on your credit report. Ideally, you should do this several months before you apply for a refinance loan to allow adequate time for creditors to report payment and bureaus to remove wrong information.
Seek out a mortgage lender to handle your refinance. Usually, you can work with the same representative who closed your original mortgage. In fact, you may even receive a phone call before your interest rate expires to remind you it’s time to refinance. If you were unhappy with your lender or she is unavailable, ask for referrals from friends, coworkers and financial professionals as you would with any mortgage loan. Unless your credit disqualifies you from the prime mortgage market and you must use someone specializing in bad credit mortgages, anyone can help you with your refinance.
Get interest rate and mortgage fee quotes. The beauty of a refinance loan is that you don’t have to wait for someone to build your home or coordinate with their schedule. Because you already live in the home and have made payments towards your principle loan balance, you may find your tax appraisal is high enough to qualify you for a refinance without requiring the services of an outside appraisal company. Not only does this save you time, you save hundreds or even thousands of dollars.
Wesley Pritchard is a freelance writer who writes about mortgages and refinancing.
