With interest rates hitting fresh lows due to the Greek solvency crisis, many home owners are wringing their hands anew over the decision on whether or not to refinance their ARMs (adjustable rate mortgages). Most ARM holders are in a great position, having had their mortgages reset lower and lower every year for the last five years. Now, however, with fixed rate options so tantalizingly low (hovering around 5% for conforming loans), many owners whose ARMs already reset in ’09 are worried about the 2010 resets. Here is a look at the pros and cons of biting the bullet and refinancing to a fixed rate mortgage:
PROS:
- Catching it at the low: while no one can time the markets, it’s fair to say that you would be locking in your rate right now at very close to historically low rates.
- Peace of mind: you will be calm knowing that you will know exactly what your payments are going to be for the next 15 or 30 years, without the worry of having them change.
- Headache free: you don’t need to stress about refinancing your loan again (at least for a very long time, if ever).
CONS:
- Extra equity: as approximately 80%+ of New Yorkers who have ARMS carry the Interest Only variety (versus their principal and interest brethren) no equity has been built up in your home. In today’s tougher lending market, you will need to plunk a sizeable 20% of your home’s value as a down-payment to qualify.
- Migraines: not only is the loan process a pain due to the mountains of documentation you will need, but the appraisal process isn’t any better.
- Higher payments: yes, your monthly payments will go up now that you’re contributing to principal, a double-whammy to your cash-flow once you account for the sizeable equity payment.
If liquidity is not your top-most concern at this time, and you’re in it for the long haul, it may make all the sense in the world to strongARM your way into a fixed rate product.
{ 1 comment… read it below or add one }
I think that if you plan on staying in your place for the foreseeable future, it makes sense to refinance to a fixed rate from an ARM, especially since many ARMS are indexed to 12-month Libor.
While 30-year fixed rates are at historic lows and have been moving lower, Libor has been increasing. So while your current payment may be low, you run the risk of getting squeezed in the next couple of years, and you are exposed to very large potential rate hikes if inflation gets out of hand.
It’s a question on greed vs. fear – if you are greedy, you may be able to get a better 30-year fixed rate if you hold out a bit longer. But if you wait too long, you may miss the boat entirely. For me, I fear big rate-hikes long term, so if I was staying put I would refi to a fixed-rate now.