Interest rates have been at or near historic lows for several years now. As a result, people who have adjustable-rate mortgages have been on easy street for some time. As you have probably heard, however, it appears that interest rates will be rising before too long. If you currently have an adjustable-rate mortgage, then, the interest rate on your loan may start climbing for the first time in recent memory. Is it time to switch to a fixed-rate mortgage?
Should You Switch to a Fixed-Rate Mortgage
Since interest rates are about to start rising, it may seem obvious that people who have adjustable-rate mortgages should switch to fixed-rate loans as quickly as possible. However, just because you have an ARM doesn’t mean that switching is right for you. When it comes to financial matters like these, jumping the gun is never a good idea. Instead, you should sit down and consider a few things before making your decision.
In a perfect world, it would be easy to tell whether or not a fixed-rate loan makes sense for your current situation and financial picture. However, it tends to be a bit more nuanced than that–especially if you want to make absolutely sure that you have the best loan terms possible. Before making your decision, then, carefully consider the following factors to ensure that you are making the right move:
Get Professional Advice
Unless you are a mortgage expert yourself, don’t attempt to make this decision on your own. The fact is that deciding between adjustable-rate and fixed-rate loans is complex and confusing, and everyday people can easily get in over their heads and end up with loans that don’t suit their specific circumstances.
Make an appointment with a loan officer to assess the situation. Don’t just focus on the mortgage end of your financial picture, however. Consider your entire financial situation to ensure that your loan suits it well. Ask as many questions as you need to, and be prepared to answer many yourself. For example, how long do you plan to stay in your house? If you’re only staying for a few more years, switching might not make sense. When will you be retiring? What is your cash flow situation like?
Review Your Most Recent ARM Reset Notice
As you are probably already aware, your mortgage servicer sends ARM reset notices whenever your rate is about to adjust. Typically, these notices are sent out anywhere from three to six months before the rate is expected to change. The typical reset notice includes the date and amount of the expected change. Odds are that you’ve received plenty of these notices in the last few years, but they were probably notifying you that the rate was dropping. That won’t be the case for much longer.
Review Your Adjustable Rate Rider
Now is the time to pull out your mortgage paperwork to review its adjustable rate rider. By doing so, you will gain a clear understanding of the specific terms of your adjustable rate loan. The vast majority of ARMs have caps in place, and your rider should outline yours. Periodic and lifetime caps typically apply. These caps place limits on how much the interest rate on your loan can rise each year and over the entire life of the loan. If you are confused about anything that you find in your mortgage paperwork, check with your servicer for clarification.
Don’t Reset the Term of Your Loan
If you decide that switching to a fixed-rate mortgage is right for you, you may simultaneously be tempted to reset the term back to a full 30 years. After all, your monthly payments should drop by a lot, which is certainly enticing. However, you will end up paying far more interest by doing that–especially if you have had the loan for around 10 years or so. In that case, sticking with the remaining 20-year term or even dropping down to a 15-year term would be far better. Your payments won’t drop, but you’ll pay far less interest at the end of the day.
If you are holding off on switching to a fixed-rate mortgage because you tried and failed to refinance in the past, try again. Given the current circumstances with interest rates, it is well worth it to take another look at the situation.
Like anyone, you’d like to keep your mortgage as affordable as possible. If you have an adjustable-rate loan, now may very well be the time to switch over to a fixed-rate mortgage instead. Still, this isn’t a foregone conclusion, so heed the advice above to ensure that you make the best decision possible.