What to Weigh if Considering a Refinance From ARM to a Fixed Rate Mortgage


April 15, 2005 LOS ANGELES - People get jumpy when it comes to their monthly expenditure layout. Especially when it involves the biggest purchase of their life, a home. Naturally, as we see interest rates on the gradual upslope we also see some homeowners who are inclined to get off the bus while they still can (so to speak). Translated, it means many homeowners either are considering, or taking action to dump their existing adjustable rate mortgage for the ever-predictable and solid fixed-rate home loan financing.

Here's the kicker: If switching from an adjustable rate into a fixed interest rate mortgage a borrower is likely choosing to pay a higher rate. At least for the moment. This "defies gravity" somewhat when you consider that it is predominant that a homeowner will refinance in order to obtain a lower rate.

There are three reasons why a homeowner would backtrack as such:

  1. Many are refinancing as a result of having made a decision to keep their home longer than originally anticipated.
  2. Some perceive it to be more simple when planning their financial future if mortgage rates are not fluctuating, as is common in ARM loans.
  3. A number of homeowners have simply changed their minds about mortgage rates and are instinctively certain rates will continue to gradually climb for some time to come.

The big question is, "Will rates continue to increase?" The answer is "yes," rates should be going up continually for an unknown duration of time. The MBA's (Mortgage Bankers Association) recent forecast calls for mortgage rate increases totaling approximately three-quarters of a percentage point throughout the next three quarters of this year.

The above indicates why the hybrid ARM has been the choice of an astonishing number of real estate and homeowners lately. This type of loan allows the locked interest rate to remain unchanged for for three or more years. Most industry forecasters and analysts decline to do just that, forecast. Particularly tough is getting an analyst to actually publish anticipations and predictions for the long haul for fear of being wrong.

The best tips we can offer when considering a lateral move out of one type of mortgage into another is to bear in mind how long you anticipate owning the home. This is an important deciding factor for those considering the switch from an ARM into a higher-rate fixed interest mortgage for obvious reasons. No one wants to get in a pickle by continually having to pay higher rates on an ARM as plans to inhabit the home change for the longer.

Article published April 15, 2005.
By Stockton Marquette, Mortgage Industry Analyst.


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