Time to Re-Finance Your ARM?

While short term interest rates have been steadily rising recently, long term rates have not risen significantly. This has resulted in what is called an "inverted yield curve", where short-term interest rates approach or exceed long term rates. If you financed your home with an Adjustable Rate Mortgage (ARM) at a low rate within the last few years, you may be in for a nasty surprise when your rate adjusts.

For instance, I refinanced my home almost three years ago with a 3/1 ARM at 3.5%. The interest rate on my ARM is scheduled to adjust in July. There is a 2.0 cap on my initial adjustment and because short term rates have risen considerably, my rate will likely increase the full two percentage points. If rates continue to rise in the future, my rate could max out at 9.5%, which is the maximum rate cap contained in my mortgage note.

Instead of sticking with the ARM, I could refinance with a 30 year fixed at about 6.25%, locking in that rate for the life of the loan. This would protect me from the risk of further rises in interest rates.

Whether or not you should refinance depends upon your own individual circumstances. Refinancing may make sense if you plan on keeping your home for long enough to recoup the additional costs. With the recent rise in short term rates, refinancing your ARM is definitely worth discussing with your mortgage banker or financial advisor at this time.

Adjustable-Rate Mortgages Are A Smart Move for Some, But Not All [RealEstateJournal.com]