How to Refinance an Adjustable Rate Mortgage

Adjustable rate mortgages offer a lot of flexibility for the homeowner. They are especially good when interest rates are low and going lower. When the rates turn north your house payment goes up at each adjustment period. Refinancing an existing mortgage can save you money. Read on to learn how to refinance an adjustable rate mortgage.

Difficulty: Moderate

Instructions

1. Look for the best interest rates when you are ready to refinance. Banks and financial institutions are competitive. Talk with a mortgage loan specialist at several banks in your area to get a feel of the current interest rate environment before you refinance.

2. Know the new adjustment rate and fixed time periods. Interest rates change over time. Your payment is based on the current rate and is readjusted after mutually agreed intervals. Three-, five-, seven- or 10-year fixed intervals are common. After these periods the rates adjust either higher or lower.

3. Take closing costs into consideration. If your intentions are to sell the house in the near future determine if the closing costs are more than what you would normally pay with your current mortgage.

4. See if your adjustable rate mortgage has a penalty clause for refinancing too soon. Many banks have prepayment fees for the first three years.

5. Ask your banker if a discount is offered. Some banks give an initial rate lower than the going rate. Balance this with loan fees to see if it is worth doing. Also, what is lower in the beginning usually ends up being a higher rate when the discount period expires.

6. Seek adding interest-rate caps when you refinance your mortgage loan. Your payment only goes up as high as the caps. "Periodic caps" limit the rate for each adjustment period. "Overall caps" limit the rate increase for the entire time of the loan.

Tips & Warnings

• Rates are based on an "index rate." When the index is going up or down so does the interest rate, and it's adjustable to the current rate at time of resetting.
• Caps have three numbers. For example a loan with a 2-2-6 means 2 percent for the fist year with no more than 2 percent maximum each year but the maximum amount for the length of the loan is no more than 6 percent.