The How-to-Refinance Toolkit: Adjustable-Rate Mortgages

By Richard Barrington
NFNS Columnist

As the name suggests, adjustable-rate mortgages have interest rates that adjust periodically to prevailing market rates. Despite this feature, and indeed because of it, knowing when and how to refinance an adjustable-rate mortgage can have a profound impact on the stability of your future debt burden.

Therefore, a how-to-refinance toolkit needs a special list of situations, including how to refinance an adjustable-rate mortgage.

Going to Fixed Interest Rates

There are a number of reasons a person might switch from an adjustable- to a fixed-rate mortgage:

  • More stability. The first jump up in monthly payments due to rising rates can come as a shock to an adjustable-rate mortgage holder. If the payments are affordable at current rates, some borrowers prefer to lock in those rates rather than gamble on what the future might bring.
  • A view on market interest rates. Borrowers who have a clear perspective on the financial markets might have a firmly held view on whether interest rates will rise or fall. These borrowers would favor an adjustable-rate mortgage when they expect falling interest rates and fixed rates when they expect them to rise.
  • A sense of history. Even without a forward-looking perspective on interest rates, a borrower might decide not to fight the patterns of history. Mortgage rates are still lower than they've been over most of the past 35 years, suggesting that an adjustable-rate mortgage may prove to be a bet against the odds.

Other Options

As with any mortgage, adjustable-rate mortgages can also be refinanced to extend the term of the loan as a debt-management tactic or to obtain better terms, especially if the borrower's credit rating has improved since the initial loan.

Despite the market unpredictability that is inherent in adjustable-rate mortgages, a how-to-refinance toolkit is not complete without considering them as well as fixed-rate mortgages.

About the Author
Richard Barrington is a freelance writer and novelist who worked as investment industry executive for over twenty years.

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