Taking Your Pick between Refinancing and ARM Reset

When making a financial decision like choosing between refinancing and allowing your adjustable mortgage loan to reset, how do you choose which one’s best? The best thing to do is make a comparison of the pros and cons of each option. 

Now, if you have taken advantage of an Adjustable Rate Mortgage loan or ARM, what are the benefits that you will get to enjoy as a homeowner? Basically, lenders will reward you with a lower monthly payment because you are taking that risk that the interest rate could rise in the future. Naturally, the opposite of this is that interest rates could also decrease – which is when you will reap the benefits of having an ARM. 

All about ARM Rates Reset 

It is your responsibility as a homeowner to ensure that you are aware about the terms and conditions of your mortgage loan. In the case of loans with adjustable rates, the period when your home loan will be reset does not mean that it will automatically increase.  

The new interest rate is based on a formula which is based on specific computation. For example, the current interest rate will depend on prevailing market conditions, depending on the ongoing Cost of Fund Index or the Constant Maturity Treasury. 

So how would it be possible for the rates to actually be lower than what you are currently paying? As mentioned earlier, once the ARM resets, it would all depend on the current real estate market conditions.  If the market rates have declined since you first took out the mortgage, the newly reset rate could be lower by 4% to 6%.

To determine whether the rates will be higher or lower, it is important to keep all your mortgage-related documents intact. Find out what index and margin adjustment should be. Depending on the ongoing market rates, you need to determine what the index is and consider the margin – so that you will have an idea about what the new rate would be if you refinance.

Mortgage Refinancing & Locked-In Rates

If you think that you should not go for refinancing anymore if, after the computation, you see that the rates will be lowered, think again. It is still a viable financial decision to refinance if the ongoing rates are low.  What you can do is lock down a long-term rate while the percentages are low. 

On the other hand, choosing to reset your ARM instead of refinancing is a good idea if you see yourself moving within the next two or three years. For this, paying several thousand dollars to refinance your home may not necessarily be worth it. 

You can also do this if the value of your home has dropped and you want to see the market stabilized before refinancing.  Or, if you need additional equity, you can pay down the additional principal of the mortgage loan prior to refinancing. 

It is an absolute must for you to lay down all your options on the table before deciding whether you should opt for a mortgage refinance or simply allow your ARM loan to reset. If you see that the rates may decrease, then you don’t have to go through the hassles of mortgage refinance application and simply let the ARM reset when that time of the year arrives. 

Article Tags: Mortgage Loan, Interest Rate

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