Consumers can choose between and adjustable rate mortgage, or ARM, or a fixed rate loan. Fixed rates offer long term stability while adjustable rate mortgages offer lower initial start rates, which is why many borrowers select an adjustable rate loan. However, the initial rate for adjustable rate mortgages is sometimes referred to as a “teaser” which is set artificially low in order to attract a borrower. Or, the loan program is of the hybrid type which is an adjustable rate mortgage which keeps the initial rate fixed for a predetermined period of time, say for 3, 5, 7 or even 10 years. Hybrid start rates are also lower than fixed. But because adjustable rates do in fact adjust, as interest rates rise so too will the individual borrower’s mortgage rate rise as well.
To keep rates from adjusting too high over time, interest rate caps are put in place limiting how high the rate can ever be by as much a five or six percent above the start rate. If you started at 3.50% and the lifetime cap is 6.00%, in theory your rate can go as high as 9.50%. The Fed has predicted it will continue to raise rates in the future and have indicated rates could go as high as 0.75% over what they are today. If you have an adjustable rate loan, should you think about refinancing into a fixed rate?
That depends upon how long you intend to hold onto the current property. If you intend to sell the home and pay off the existing mortgage it probably doesn’t make much sense to refinance into a fixed due to the number of closing costs associated with getting a mortgage.
However, if you do intend to stay where you are for quite some time and you have an ARM it might be a good idea to refinance out of an ARM and into a fixed to avoid the possibility of interest rates going much higher. Yes, you may have a slightly higher rate now with your existing variable rate loan, but you need to consider what might happen in the future.
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