Adjustable Rate Mortgage Refinancing is changing. Everyone was going from their thirty-year fixed to their A.R.M., but now the reverse is true. When we live in a rate-dropping environment, an adjustable rate mortgage is great because every time the loan adjusts it adjusts down. However, in a rising rate environment there is one key to living safely on an adjustable rate mortgage: make sure the fixed period is longer than you will need. 

The fixed period is the beginning period of the loan where the loan payment will not adjust. The options range from one month to ten years; the shorter the period the lower the rate. Therefore, it is crucial to understand your plan and needs. Furthermore, a good mortgage broker will first listen to what your plan and goals are and secondly design a plan unique to you. It is important for those refinancing into and adjustable rate mortgage to understand whether they are long run in the house or short run. If their needs are short run then it is wise to come up with a conservative estimate on how long they are in the house. For example is someone would estimate that they would live in a house for three years than it would be recommended to get on a five year A.R.M. On the other hand, it someone is to stay in their house for the rest of their life, than a long-run plan ought to be put together. However, sometimes we find that our customer wants to stay in the house long run but have short run loan needs. Such as, next year the customer wants to be in a fifteen-year fixed, however, it is not practical right now until they pay off all of their debt. Sometimes these individuals will refinance into an adjustable rate mortgage to get the lowest rate to free up money to pay off their debt. Afterwards, they refinance into a fixed rate mortgage.

To sum it up, an adjustable rate mortgage is not intended for individuals to watch their interest rate adjust all over the place. Rather, those investing their money on Wall Street only want to lock in at today’s rate for only a limited period of time before they take a chance on the market being better. Conversely, the borrower takes the chance that the market will be better as well. So people use adjustable rate mortgages to pay the least amount of interest if they play the market right. But these loans are not some game or gamble, there are many practical applications for adjustable rate mortgages.

The most widely used is using A.R.M.s as transitional loans. Many subprime borrowers get on adjustable rate mortgages while their credit is low because it does not make sense to lock into a loan for thirty years, while your credit is at its lowest point. Furthermore, people will refinance into adjustable rate mortgages to give them a change to fix their credit on a lower interest rate (A.R.M. rates are usually lower than that of a thirty-year fixed). Once the two or three year A.R.M. is up, refinance into a lower thirty-year fixed rate on your new credit score. What happens if interest rates begin to rise in the meantime? Well over the past year, the mortgage rates have increased which is causing many individuals who have adjusting A.R.M.s to refinance into fixed rates. The fixed rate market has held fairly steady for conforming loans. Therefore, it is providing many individuals who need to extend their period of no adjustments the chance to safely refinance their adjustable rate mortgage back into a fixed rate mortgage.