How to Treat Your 10-Year ARM: Refinance or Keep the Variable Rate?
Published May 1, 2022
A 10-year ARM refinance can set borrowers on a faster path to outright homeownership. While many homebuyers opt for the stability of a fixed-rate mortgage, others take advantage of the low initial rate offered with an adjustable-rate mortgage. A 10/1 ARM may have been particularly appealing to you when you purchased your home because of the low interest rate you have for the first ten years of the loan. However, now that the 10-year fixed-rate period is coming to an end, you're looking at the prospect of regular interest rate adjustments for the remaining life of your loan. If you want to avoid dealing with variable interest for the next decade or more, consider a 10-year ARM refinance.
The many benefits of a mortgage refinance
Interest rates have risen noticeably across 2022, and that trend is expected to continue in the near future. This means that the rate that you locked ten years ago may be poised to adjust slightly higher. The result will be a higher mortgage payment and higher interest charges. Keep in mind that this same event will occur every year. In some cases, your rate might decrease. But, in many cases, it will rise.
Those who opt for a mortgage refinance choose to replace their current loan with a new mortgage. Homeowners can do this with a 10-year ARM refinance loan, a 15-year refinance loan, or any other mortgage term that suits their needs. As a result, you might be able to access some of the equity you've been accumulating over the last ten years. This equity could be used for debt consolidation, putting the kids through college, or for any number of other beneficial purposes.
Additionally, a mortgage refinance provides a chance to reestablish a fixed mortgage payment and to readjust your loan payoff date. Compared to the possibility of dealing with a readjusting interest rate and mortgage payment every year, a mortgage refinance makes sense for many homeowners. But which loan program is best for your home?
The pros and cons of a 10-year ARM refinance
Most homeowners appreciate the benefits of their 10-year ARM until the initial fixed-rate period expires. At this point in the life of the loan, a 10-year ARM refinance may seem ideal. Through a 10-year ARM refinance, you can enjoy a 10-year fixed-rate period once again. You can also reset your loan payoff date with a new 30-year term – or something shorter if that's what you prefer. At the same time, you could take equity out of your home and enjoy reasonable monthly mortgage payments through a 10-year ARM refinance.
However, if you choose a 10-year ARM refinance, you will be back in this same situation ten years from now. At that time, rates could be much higher, and you may be forced to refinance to a higher interest rate or deal with an adjusting interest rate. If the rates are extraordinarily high at that time, your adjusted mortgage payment with a 10-year ARM refinance may become unmanageable.
Additionally, a 10-year ARM refinance will push your final loan payoff date back by ten years. For example, your current loan has 20 years remaining on the term, but the new loan might have 30 years. While stretching out the payments for 30 more years can establish manageable mortgage payments, this could negatively impact your plans for retirement or other major life events. For example, do you plan to retire in less than 30 years? If so, do you intend to still have a mortgage payment at that time? With a 10-year ARM refinance, this is a significant possibility.
When a 15-year refinance is a better option
A 15-year refinance is an alternative mortgage refinance solution. This loan program gives you a low fixed rate for the term length. Because of this, you can enjoy a stable mortgage payment until the loan is paid off without worrying about a rate readjustment. This may simplify your budgeting efforts. It also provides the peace of mind that you may continue to afford to own your home as long as other major financial factors do not change.
With a 15-year refinance, your term length is 15 years rather than 30. As a result, you will pay your mortgage off in half the time compared to a 10-year ARM refinance. Remember that you may still have 20 years left on your current, original home loan. By choosing a 15-year fixed-rate loan, you can pay off your home five years sooner than you would if you decided not to refinance.
Do you intend to take equity out of your home through your mortgage refinance? A cash-out 15-year refinance is an option to consider. Because the term is shorter, you will not be strapped with an additional few years of interest accumulation and mortgage debt.
Rates for 15-year fixed-rate loans are also remarkably competitive. In fact, they are usually lower than a 30-year fixed-rate loan, so you can avoid paying more interest charges than necessary. In fact, because of the shorter term length, this may be the loan refinance option with the least interest charges over the life of the loan.
Generally, a 15-year refinance loan is strategically a better option if you want or need to pay off your mortgage payment sooner. It is also more advantageous if you need or want the stability of a fixed rate and a fixed interest payment over the life of the loan.
Get to know your possibilities today
Many factors impact the actual loan terms you qualify for, such as your credit score, income and expenses, your home's value, and more. Before you settle on one specific mortgage refinance, it makes sense to explore your top options in detail carefully. Schedule an appointment today to learn more about the strategic benefits this option could provide to you.