Do you have an adjustable-rate mortgage? There are some benefits to having one, but it’s undeniable that there are potential risks as well. In fact, we often hear from homeowners who have adjustable-rate mortgages. They want to know if they should refinance to a fixed-rate mortgage.
It’s a good question to ask. In this post, we’ll talk about some of the reasons people with adjustable-rate mortgages refinance into fixed-rate mortgages. We’ll also give you some of the specific benefits of doing so, so you can make the best decision for you and your family.
Adjustable-rate mortgages played a big role in the housing crisis of 2007 and 2008. Some banks pushed borrowers to accept adjustable rates. In some cases, the borrowers didn’t understand the implications and were blindsided when their interest rates (and monthly payments) skyrocketed.
Despite the challenges of the Recession, the past five or six years have been good for people with adjustable-rate mortgages. The economy has been strong, and, in many cases, people have seen their interest rates decrease.
However, mortgage rates are on the rise. The 30-year fixed rate average has increased 0.80% since September 2017. That might not sound like much, but over the life of a mortgage, it adds up. If you have an adjustable rate on your mortgage, the main thing to do is to pay attention to information you receive from your lender. If your mortgage rate is going to reset, you'll receive notice about six months before the increase goes into effect.
An increased interest rate is not, by itself, enough reason to refinance. If you have only a few years left on your current mortgage, you may be better off riding out the increase due to the cost of refinancing.
If you currently have an adjustable-rate mortgage with a long mortgage period remaining, you may want to consider refinancing it to a fixed rate.
Refinancing to a fixed-rate mortgage offers many potential benefits. Here are some things to consider.
1. The biggest benefit of changing to a fixed-rate mortgage is stability. With an adjustable-rate mortgage, your interest rate is subject to change based on fluctuations in market interest rates, which are affected by variations and stresses on the economy.
These fluctuations are the reason many homeowners ran into trouble during the recent housing crisis. They chose adjustable-rate mortgages after being urged to consider them by bankers. They started out with low interest rates. But, when the economy ran into trouble, their rates skyrocketed.
That won’t necessarily happen to you, but it’s important to remember that interest rates do change. It’s very difficult to predict what will happen to interest rates over the life of your mortgage. There’s certainly a risk your current rate will increase in the next few years.
With a fixed-rate mortgage, you will know exactly what you will be paying each month. There are no surprises. However, on the flip side, interest rates tend to be higher with a fixed-rate mortgage than on an adjustable rate. That’s so lending institutions are protected if rates increase dramatically over the life of the mortgage.
2. Another benefit of switching to a fixed-rate mortgage is that you may be able to save on interest over the term of your mortgage even if you restart the clock on your term. Every situation is different, so find a mortgage lender you trust and look at all of the ramifications of refinancing based on your goals.
3. If your monthly payment is lower after you refinance, you could continue to pay the same amount each month. That way, you’ll reduce the principal and pay less in interest in the long run.
4. Finally, with a fixed-rate mortgage, you have a lot of flexibility with the terms you choose. If you have enough income to afford a shorter term of 15 or 20 years, you can save thousands of dollars in interest over the term of your mortgage.
Of course, the biggest potential downside of a fixed-rate mortgage is that you won’t benefit if mortgage rates drop in the future. You’ll be locked into the fixed rate unless you have the time and money for another refinance. However, that scenario is unlikely for the foreseeable future, given today's interest rate environment.
If you currently have an adjustable-rate mortgage and you’re concerned about managing your payments if interest rates go up, now is a good time to consider refinancing to a fixed-rate mortgage.
To learn about Addition Financial’s refinancing options for homeowners, please click here.