3. Refinance to Change Your Interest Rate Terms
Another great option if you’ve almost paid off your annoying mortgage is refinancing to an adjustable rate mortgage (ARM). “More and more consumers recognize the financial benefits an adjustable rate mortgage can provide under the right circumstances,” says Hensling.
Let’s say you want to sell your home in a couple of years and right now your fixed rate loan is $400,000 at 4.25% paying $1,976.76 every month. Hensling notes if the homeowner refinanced to a hybrid adjustable rate mortgage fixed for five years at 2.875%, this would minimize the monthly payment to $1,695.57 per month and save $281.19 each month.
Jeremy Brandt, CEO of WeBuyHouses.com, agrees with him, adding, “If a home is nearly paid off, the vast majority of the monthly payments are going to equity and not interest. Refinancing to an ARM might solve short-term cash flow issues by reducing the monthly payment at the expense of subsequent payments.”
So, if interest rates start maximizing, the monthly payments may minimize over a period of time. However, as an alternative, if you have an ARM, switching to a fixed rate mortgage may not lower your current monthly payments, but it can actually stop your payments from growing.
“This makes sense if current fixed rates are lower than the ARM interest rate, or if you expect to move later than the next three years,” says Brandt. But he warns that if you’ve been in an ARM for a while, the fixed rate you refinance into may be higher than your existing rate and this can most likely cause your monthly payment to go up.
