To take the decision to refinance a mortgage is just a simple comparison of costs versus savings, but that is only if you’ll replace an old fixed-rate loan with a new one.But a big “if” comes here.
A huge number of homeowners want to get out of adjustable-rate loans, and for them to tally the savings is trickier.
If in a month you save $200 from a new fixed-rate mortgage and closing costs were $4,000, then the savings would take 20 months to offset the costs. You would really save $200 in a month by refinancing, after that breakeven point.
Those homeowners who have adjustable-rate mortgages can’t pinpoint the monthly savings over the long term because they don’t know what their payments will be years down the road.
If the homeowners have ARM charges, 7 or 8 percent, and there is a possibility that these charges will increase up to 10 or 12 percent then refinancing is probably a good choice for them. According to a survey the 30-year fixed-rate loan is now at surprisingly low average 5.12 percent. Now this thing must provide more than enough savings to offset refinancing costs.
However, due to recent resets tied to indexes, less than 4 percent is being charged by some older ARMs, similar to the one-year Treasury, which are at record lowest levels. For now you’re payments might be increased by refinancing to a 5 percent fixed loan, although there are good chances that with it you would be able to avoid higher ARM payments later.
So How to Make the Decision About What You Should Do?
What homeowners with ARMs should do is that they should start by gathering key facts: these facts are the balance that is left on the current loan, the current interest rate and their monthly payment, the index by which future rate adjustments are determined, the margin that has been added to the index to figure future rates, the next adjustment date and the intervals between the adjustments, the annual caps which is used to determine the maximum amount the rate can rise or fall in each reset, the lifetime cap which is used to set a ceiling which can never surpass by the rate.
It is also needed by the homeowner that he should gather information about the new, fixed-rate loan: the information that he has to gather is about the closing costs, interest rate and monthly payment.
The first step that he has to take is to find out all the monthly savings that he could possibly do from the date of the refinancing to the next date when the ARM would reset if you kept it. It is because the ARM rate is fixed during this period, you may also use the Refinance Breakeven calculator to see how much you might save initially.
What next you should do is that you should use the Adjustable rate calculator to find out that what would be your ARM payments if you encounter the worst possible case, if they were to go up until reaching the lifetime cap the maximum allowed at every reset.
For a breakdown on monthly payments click the View Report button and using the breakeven calculator compare them to the payments on the new fixed-rate loan. Since the highest possible ARM payments are produced by it hence this will give the shortest possible time to break even.
After completing the above mentioned process, check the history of your ARM index to have some knowledge about its highs, lows and averages over time. For a sense of the savings you might realistically hope for, experiment with these in the Adjustable Rate calculator. While it is not guaranteed that the future will be the same, but doing this you may know that whether your ARM rate is likely to rise as high as allowed.
Lots of historical ARM index data is present on the website of HSH Associates, or type into your search engine your index name and the terms “graph” or “table”.
You can never know exactly how much you might save when you opt to refinance from an ARM to a fixed-rate loan. So a huge part of the decision comes down to peace of mind. You know your payments will never change with a fixed-rate loan, while an ARM is always a gamble.