This is part of an ongoing blog series that discusses commonly used mortgage strategies among home buyers and homeowners in Washington. Today, we’ll talk about how a homeowner in Washington State could benefit by refinancing from an adjustable-rate mortgage (ARM) into a fixed-rate home loan.
Adjustable Versus Fixed Mortgage Loans
Before we get into the reasons why a homeowner might refinance from an ARM into a fixed-rate loan, let’s do a quick review of the terminology:
- An adjustable-rate mortgage loan has an interest rate that can change periodically over time. Most of the ARM loans in use today are “hybrids” that start off with a fixed interest rate for a certain period of time, after which they change or reset annually.
- A fixed-rate mortgage loan, in contrast, has a rate that generally stays the same over the life of the loan. As a result, the borrower’s monthly payments tend to stay the same as well. There are different versions of the fixed mortgage, but that is typically how it works.
So right away, you can see why a homeowner in Washington state might refinance an ARM into a fixed-rate loan. Adjustable mortgages tend to start off with lower rates when compared to a long-term fixed rate loan. But that’s only during the initial stage. ARMs live up to their name by adjusting annually once that initial stage has passed. And this is when a lot of homeowners start to consider a refinance.
The ideal scenario, for most homeowners in the situation, is to refinance from an ARM loan into a long-term fixed mortgage while rates are relatively low. This strategy makes sense if you plan to stay in the home for the foreseeable future.
Rate Changes: Refinancing Now vs. Later
While no one can predict future mortgage rate trends with complete accuracy, the general consensus among analysts is that interest rates will gradually rise during 2018.
We’ve seen a bit of a rising trend already. Over the last few weeks, the average rate for a 30-year fixed mortgage climbed from the high 3% range to the low 4% range, according to the weekly survey conducted by Freddie Mac.
On February 1, 2018, the company reported:
“The Federal Reserve did not hike rates this week, but the market views future hikes as a near certainty. The expectation of future hikes and increased borrowing by the U.S. Treasury is putting upward pressure on interest rates. The 30-year fixed rate mortgage is up over a quarter of a percentage point (27 basis points) from the first week of the year.”
The big picture here is that many economists expect that rates will continue to rise gradually throughout 2018, possibly climbing as high as 5% according to one forecast. So, for Washington homeowners who are thinking about refinancing from ARM to fixed, it might be better to do it sooner rather than later.
Other mortgage strategies in this series: