- The Washington Times - Thursday, November 4, 2010

Adjustable-rate mortgages (ARMs) have garnered some bad press during the recent housing crisis, often getting lumped in with other types of mortgages, such as interest-only, zero-down-payment and “pay-what-you-want” loans, as products that could be dangerous for homeowners.

In recent months, particularly as mortgage interest rates have dropped to historically low levels, many homeowners with ARMs have been refinancing into fixed-rate loans. Homebuyers primarily are opting for fixed-rate loans, too. In fact, the Mortgage Bankers Association Weekly Mortgage Applications Survey typically shows that applications for fixed-rate mortgages currently represent approximately 80 percent of all mortgage applications.

Homeowners who have an ARM may feel a little panicky and pushed to refinance out of fear that their mortgage rates will rise when their loan “resets” - when the fixed-rate period of their loan ends and the mortgage rate begins to adjust regularly.

ARMs are offered with a one-year, three-year, five-year, seven-year or, occasionally, 10-year fixed rate before the rate begins to adjust, usually annually. Lenders suggest that borrowers review their ARM terms carefully before automatically rushing to refinance because, with interest rates extremely low, their adjusted mortgage rates are not likely to result in more costly monthly payments.

“Before anyone makes any decision about refinancing out of an ARM, they should really take a careful look at their loan,” says Alex Lieb, operations manager for Access Capital Mortgage, an affiliate of Presidential Bank in Bethesda, Md. “If their loan has reset recently or is about to, and the index their loan is tied to is lower, then their payments may stay the same. For some people, their payments could even be lower.”

Mr. Lieb says refinancing may not make sense for some of these ARM borrowers, particularly if they are going to sell their home in the next year or so.

Many ARMs are linked to the LIBOR - London Interbank Offered Rate - index, which is has remained low throughout 2010.

“People who plan to stay in their property for just another one or two years should probably consider keeping their ARM to enjoy these low rates, since most people think mortgage rates are likely to stay this low for at least a year or two,” says Steve Cohen, vice president and mortgage originator at First Place Bank in Rockville, Md.

“For homeowners who expect to stay longer than another couple of years, it probably makes more sense to lock in a fixed-rate mortgage at these low rates to make sure they keep them for their entire loan.”

Mr. Cohen points out that even people who plan to move soon may want to consider a fixed-rate loan.

“People can’t always plan everything the way they think they can, and they don’t always know for certain that they will be able to sell, even if they must move,” Mr. Cohen says. “It may be necessary to keep the property as a rental, in which case, having a fixed mortgage can be a big benefit for cash flow.”

Whether you have an ARM or a fixed-rate mortgage, if you are considering refinancing, it is important to evaluate your goals carefully before following the crowd and applying for a new loan. First, think about how long you expect to stay in your home. Refinancing generally costs 3 percent to 6 percent of the mortgage loan, so it should not be undertaken by homeowners who plan to move soon and will not have time to recoup their expenses.

Next, establish whether the goal is to reduce the overall interest paid on the home loan, lower the monthly payment, own the home without a mortgage as soon as possible or use the home equity to pay off debt or make a home improvement. All of these are valid reasons to refinance, but each goal may result in a different choice for a new loan program.

After evaluating their goal for refinancing as part of their overall financial plan, homeowners, whether they have an ARM or a fixed-rate loan, should contact a lender to discuss their options for refinancing.

“Homeowners with an ARM that is about to reset will receive a notice about their new rate,” Mr. Lieb says. “At that time, they should contact their lender to talk about the possibilities for refinancing and compare their options with another lender, too.”

Story Continues →