Fixed may not be the best bet when your rate adjusts

Special to The Times

If your adjustable-rate mortgage is about to adjust from its initial rate and term and you definitely want to stay in your home for an extended period of time, there are some avenues to explore before leaping to the obvious option -- a long-term, fixed-rate loan.

Many homeowners are in this situation right now. For starters, it's a good idea to visit with a competent mortgage account executive and work with that person to find the right choice for what you want to achieve. Your plans for the property, and the payment amount you are comfortable with, are primary considerations.

There are many misperceptions about various mortgage products. Even though mortgage interest rates have been on the uptick, there is no long-term sign that rates will absolutely continue to rise. Remember, you are seeking the best rate while you remain in your home -- and very few people stay put for 30 years.

"Homeowners should make a decision to recalibrate their mortgage based on the next chapter of their lives," said Devlin McNamara, mortgage account executive for Bank of America. "Considerations include how long they plan to be in the home, if anything about their situation has changed and their plans over the next 24 months."

McNamara said one of the ways he works with customers to evaluate their options is to look at the month-to-month and total costs over the next two years. Then compare the costs of refinancing.

For example, let's say you have a $150 difference between your present mortgage amount and the new amount after your mortgage is adjusted. Take the estimated total amount of a new origination fee, appraisal, title insurance and other costs -- say $3,000. Divide that amount by $150 to determine how many months it would take to repay the loan costs of the new loan. In this case, 20. Weigh that result against the savings from your potential new payment of lower refinanced interest rate and principal. The costs in this example show that refinancing is worthwhile only if the principal and interest payment are considered.

Everyone's need for monthly income is different. Many customers are looking to minimize their out-of-pocket expenses. Some will choose slightly higher rates to offset closing costs, and that can make sense.

For those who plan to remain in their homes for a short period of time and want to actively manage cash flow, interest-only loans might be a good option. These products are not for those looking to buy more house than they can afford or who have a difficult time managing important expenses and finances.

Although some mortgage analysts say it's beneficial -- financially and emotionally -- to pay off the roof over your head as quickly as possible, the need to have extra money on hand for emergencies, college tuition or parental healthcare often takes priority over paying down the mortgage. Typically, mid-range, five- and seven-year adjustable loans carry lower monthly payments than long-term, fixed-rate loans, thus freeing up cash that would be earmarked for the monthly mortgage payment.

Most ARMs carry monthly or annual caps and lifetime caps, so it is important to take a look at the current adjustable-rate mortgage and determine what effect you will see when the rate begins to adjust.

There are some key considerations for homeowners whose short-term (one- to three-year) or mid-term (five- to seven-year) adjustable-rate mortgages are about to move. First, review the terms of the mortgage and the need for making a change. Consider another adjustable loan, especially if you will remain in the home only for a short time. If you will remain in the home for several years, it may be beneficial to refinance into a fixed-rate mortgage. Some borrowers, especially older homeowners, prefer the reliability of a constant, fixed-rate plan.

Remember, even if you think you know what product you want, it is best to discuss your needs and options with a lender. There are programs available today that did not exist in the mortgage world five short years ago. One of them could meet your exact needs, but you'll never know about it unless you ask.

Tom Kelly is co-author with Mitch Creekmore of "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit From Property South of the Border."

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