Cutting off Your ARM (Adjustable Rate Mortgage)
One of the most compelling reasons to refinance your home is due to an adjustable rate mortgage (ARM). These types of mortgages can be rather inconvenient, as every time the interest rate changes, so does your payment, in order to reflect the interest rate hike or decline. With refinancing, however, you can change that pesky ARM into a fixed rate loan with predictable and constant payments each month.
Disadvantages to having an ARM
You may have got your original mortgage at a low rate, but since it is not a fixed interest rate, you will find that your payments are getting higher. With interest rates climbing for consecutive quarters, and likely to continue to rise again within the next year, you will find your payment increasing likewise. It can be hard to budget for monthly payment that changes as the interest rate does. An ARM means unpredictability. Even if the rate drops below your original rate, and you pay less, it is unlikely that those rates will remain in place for the term of the loan. Your budget will be relatively unpredictable as long as you own a home financed with an ARM.
Refinancing to a fixed rate loan
Instead of keeping an ARM, it is possible in many cases to refinance to a loan with a fixed interest rate. This means that you lock in your rate, and that no matter how high interest rates climb, your payments do not vary. While this can be discouraging if rates drop, the truth is that it comes out pretty even in the end anyway, since interest rates are likely to go through cycles of falling and rising over the life of your loan. The main advantage is that you have the same payments over the term of the loan, and you can count on your monthly mortgage budget item to remain steady.
A word of caution: prepayment penalties
Refinancing from an ARM to a fixed rate loan carries advantages with it, but you should be wary of prepayment penalties. Some mortgages charge fees for early repayment. Check your mortgage before you decide to refinance to make sure that any prepayment penalties will not destroy the monetary advantage of getting rid of your ARM. If you have no prepayment penalties to worry about, then you can proceed with your refinance without too much to worry about.
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