Should yourefinance into fixed-rate loan?
| Last year, I wrote an article advising borrowers on how to determine whether refinancing an adjustable-rate mortgage (ARM) into a fixed-rate mortgage (FRM) was advantageous. On recently rereading that article, I winced with the realization that I had made the problem more complicated than it had to be. Since the question continues to confront many borrowers, this article attempts to make amends. |
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Most borrowers know the ARM rate they are currently paying and when the rate will adjust, but few know the fully indexed rate. This is the most current value of the interest-rate index used by the ARM, plus the margin. The index used and the margin are both shown in the note, while the current value of the index is easily available online. Go to mortgage-x.com it has them all. The importance of the FIR is that it is the best available predictor of how your ARM rate will change. At the next adjustment date, the new ARM rate will reset to equal the index value at that time, plus the margin. [Note: usually there is a limit on the size of a rate change — this “rate adjustment cap” can also be found in the note — but in today’s market the limit is seldom relevant]. If the index stays unchanged between now and then, the ARM rate at the next adjustment will be today’s FIR.
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