How to Change a Fixed-Rate Mortgage
A fixed-rate mortgage allows consumers to lock in a fixed rate for a specific loan term. Some borrowers, however, enjoy the flexibility of an adjustable interest rate. An adjustable rate mortgage is a popular alternative for homeowners who want to secure lower monthly payments. Before switching to an adjustable rate mortgage (ARM), it helps to understand loan details.
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Instructions
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Decide if an adjustable rate mortgage is right for you. With an adjustable rate mortgage, the interest rate changes periodically throughout the loan term. The rate is typically based on prime rate (which is published in the Wall Street Journal). When the prime rate changes, so does your rate. The benefit of an adjustable rate mortgage, according to the Federal Reserve, is that lenders usually offer a lower initial interest rate on the mortgage. This, in turn, makes monthly payments lower.
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Talk with your current lender. Refinancing into a different loan product with an existing lender can cut back on costs. For example, a new lender may charge thousands of dollars in closing costs. Since your existing lender is motivated to retain your business, the company may waive closing costs or offer reduced fees.
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Find the best interest rate with comparison tools such as Bank Rate. (See resources.) Write down the best rates available to investigate further. This tool also allows you to enter credit history information (such as poor, average or excellent) to further refine your results.
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Ask about loan details. When investigating loans, ask about introductory loan terms. For example, an ARM may offer an attractive rate for the first three years. After this time, however, the loan will revert to a higher rate. Ask about these loan details, for this rate change can significantly increase your monthly payment.
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Sign the loan documents. The bank will request supporting documentation (such as pay stubs, bank statements and other financial information) to process the loan. After the loan has been approved, the financial institution will set up a signing date. This usually takes place at a bank branch. Review the final documents carefully. Check the current interest rate and loan term for accuracy.
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Tips & Warnings
If you switch to an ARM, make sure you can cover the payment increase. This is where many consumers get into trouble with ARM loans.
Watch out for interest-only ARMs. With these loan products, the consumer pays interest only for a specific period of time (up to 10 years). This allows consumers to get a smaller monthly payment. However, with these loans, you aren’t building equity in the property for the first several years.
