Have an Adjustable-Rate Mortgage? It Could Really Pay to Refinance Now

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Don't pass up an opportunity to lock in today's current low rates for the life of the loan.

If you took out an adjustable-rate mortgage (ARM) in the past, it may be a good idea to refinance your home loan now.

With ARM loans, your interest rate changes. Specifically, you'll take out an ARM that locks in your starting interest rate for a specific period of time. A 5/1 ARM would lock in the initial rate for five years, while a 7/1 ARM would lock it in for seven. After the expiration of that initial period, your interest rates can move along with a financial index and change once annually.

Here's why you should consider changing to a fixed-rate loan if you currently have an ARM.

This may be your best chance to lock in a loan at a low fixed interest rate

When you have an adjustable-rate mortgage, you perpetually have to live with the risk that your rate will go up. If that happens, your monthly payments will also go up.

You can avoid this by refinancing to a fixed-rate loan. A fixed-rate loan is also aptly named, as the rate is fixed and remains the same for the entire life of the loan. No matter what happens to interest rates, your rate will not change, nor will your payments.

Of course, you don't want the rate on your ARM to go up by refinancing, as that would immediately mean you'd get stuck paying the higher interest costs that you're hoping to avoid. You ideally want to refinance your ARM to a fixed rate with the lowest possible interest rate.

And that's why now would be a good time to act. Although there's been a shift upward in refinance loan rates in recent weeks, they still remain very competitive compared with historical trends. Chances are good that if you're a well-qualified borrower, you'll be able to refinance to a rate that's close to or below what you're currently paying on your ARM.

Even if your ARM rate is currently low, there's still a good chance you'll end up seeing the rate move to a higher one than what you could've locked in if you refinanced now. And while some experts believe rates are likely to remain low for a while, there's no guarantee that's the case -- especially as rates have stopped their steady decline for now.

By waiting to refinance, you take the risk that your ARM will begin adjusting, potentially leading to a rise in rates. And when that happens, you won't be able to refinance at a competitive rate.

How to decide if you should refinance your ARM now

To decide if it's a good idea to refinance your ARM now, get mortgage rate quotes from a few different lenders. See how the rates compare to your current loan, and check out how much you'd have to pay in closing costs.

If you can drop your rate and switch to a fixed-rate loan, you can get the peace of mind of knowing your mortgage won't ever become more expensive. You'll also get upfront savings. The money you can save on your monthly payment should cover the closing costs over time, as long as you don't move within the first few years of refinancing. You'll also most likely end up much better off in the long run.

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