If I have an ARM loan, when should I refinance? Rates are so low!

Raziel Ungar

October 27th, 2011 - 2 min read
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Over the last three years or so there’s been many swings in rates as well as anxiety for people with unemployment, low rates, and Europe possibly blowing up with their financial crisis. Plus, home values in many areas in the country have decreased significantly, and for those fully leverage with a high loan to value on their home they may not have the ability to refinance. However, the good news is on the peninsula our values have held up pretty well (see our market reports page for more detailed information).

Still, for those whose loan to value allows for the refinance of their adjustable rate mortgage (ARM) where the fixed period has passed and has adjusted to an attractive low annual rate (of around 2.95%), the question is, when is the time to refinance? Many borrowers anticipate that rates will eventually go up (they have to) but they like the low rate. So the key questions are: when will they go up? How much? And, how quickly will they rise at that time? If we could predict this future event then it would help determine the time to refinance but no one can predict the future. If rates stay low for two more years then you can refinance in two years and take advantage of the low variable rate! Right? But, if they rise in a year and jump up half a percent in one day then refinancing before this jump could make sense. So, even without our crystal ball, there is no right answer.

If you currently have a low variable rate that adjusts annually, and you’re considering refinancing, there’s two two things you should ask yourself:

  1.     How long do I plan to live in the home AND keep the mortgage outstanding on the house?
  2.     What is your threshold for risk? (or what makes you sleep well at night?)

If you plan to stay in the house for only a few more years or you have the funds to pay off the loan when rates rise, then you’re best to keep your current loan and take advantage of the low rates for now.  As you likely know already, there’s a cost to refinance and it can range from $2,500 (for appraisal, bank fees and title insurance) to as much as $7,000 or more depending on the size of the loan and value of the home. If you plan on living in the house for an extended period of time, you may want to consider doing a refi now with low rates.

Then, the next question is, what loan product should I refinance my current loan into?  Think of fixed rates as insurance: the longer the fixed term, the higher the rate. So, a 30 year fixed loan will be much higher than a 5 year fixed ARM. If you know you’ll be occupying the property for no more than 10 years and will most likely sell the home, getting a 30 year fixed loan will have you paying more interest then you need because you don’t need the other 20 years fixed that you are paying a premium for.

But, if you’re not sure how long you will stay in the home and you want the possibility of a low rate and not worrying about higher rates (what make you sleep well at night?) then a 30 year fixed could be a pretty good solution. You’ll be paying a premium on rate but keeping your peace of mind is also very important. Plus, with the 30 year fixed at historically low levels (not this low since the 1960s!), it’s pretty compelling not to lock that in if you’ll be in the home for a while.

Remember, make savvy decisions about your finances and do what makes sense for you.  Never overleverage yourself or stretch beyond your means.  So, decide on a product that matches your threshold for risk and makes sense for your financial plan for your greatest asset.

If you'd like a referral for a quality lender for a possible home purchase in the Burlingame, Hillsborough, or San Mateo areas, please drop me a line.

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