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Interest rates continue to hover near historic lows, making it a prime time for Salt Lake City homeowners to reevaluate their options when it comes to refinancing an adjustable rate mortgage (ARM) that might be getting more expensive as the economy improves. Although the economy seems to be on the upswing, however, in order for homeowners to decide whether refinancing an ARM in favor of a fixed-rate mortgage is the right move for them, it’s important to first understand some of the key differences between fixed mortgages and ARMs.
What is an adjustable rate mortgage?
With an ARM, your interest rate might go up or down based on a variety of factors. Many ARMs will start with a lower interest rate than fixed-rate mortgages. This initial rate can stay the same for years, which is why ARMs can make sense in certain financial circumstances. For instance, if you know that you’ll be selling your home before the introductory rate expires and want to take advantage of lower payments and rates, an ARM can be a great idea. But when the ARM’s introductory period is over, your interest rate will change and the amount of your monthly mortgage payment will likely go up along with your annual percentage rate (APR).
That’s because the mortgage’s APR is subject to periodic adjustments after that introductory period and your loan’s interest rate is tied to a broader measure of interest rates known as an index. But that is not the case for all ARMs, so it’s important to understand the specifics of your home loan. Many ARMs will limit the amount of each adjustment, and set a cap on how high your interest rate can go over the life of the loan.
What is a fixed-rate mortgage?
For fixed-rate mortgages, the terms tend to be much more straightforward because the interest rate is set when you take out the mortgage. The rate will not change over the life of the loan, whether that’s 15 years or 30 years. This allows homeowners to know exactly how much they will be paying for their home loan, regardless of whether interest rates rise. Many homeowners appreciate the peace of mind and predictability of a fixed-rate mortgage. For example, Zions Bank offers Salt Lake City mortgages for 25, 20, 15 and 10-year terms at a fixed rate to give local homeowners flexibility.
Why should I refinance?
A Freddie Mac survey released in February 2016 found that the national average APR for a 30-year fixed mortgage fell for the seventh consecutive week, to 3.62 percent — the lowest it’s been in the last couple of years. Near the end of 2015, economists at Realtor.com predicted mortgage rates will reach 4.65 percent for a 30-year, fixed-rate loan in 2016.
If you are locked into a fixed-rate mortgage with an APR much higher than today’s historic lows, refinancing is worth some research. Even homeowners who are currently enjoying low interest rates on ARMs should review refinancing options regularly. One thing you should consider before refinancing, however, is cost versus savings, said Jeremy Lowry, senior vice president of mortgage and construction lending for Zions Bank. “It’s foolish to refinance if you are planning on moving and will not recoup the costs associated with the refinance,” he said.
The cost-benefit balance could shift some time soon for homeowners with ARMs in Salt Lake City. After all, history indicates interest rates can’t remain this low forever, especially as the American economy continues to improve overall. So, if you’re planning on staying put for a while, talk with your lender about refinancing to a fixed-rate mortgage and see if it’s worth it for you.