Refinancing Your House: Adjustable vs. Fixed Rates

Dear Dave,

We’re considering refinancing our house and have gotten lots of advice on the type of loan we should go with. What is your opinion on adjustable rate mortgages these days? I have heard adamant opinions both ways. We would really like to hear your take on this.

Thanks -

Steve and Lynne - Grand Junction, CO

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Steve and Lynne,

Well, amazingly enough the interest rates are still incredible and we are seeing 30 year fixed rates just over 4.25%, 15 year fixed rates at about 3.75 % and 5/1 adjustable rates hovering right around 3.875%. These are all fantastic interest rates, regardless of if you choose a fixed rate or an adjustable one. 

Adjustable rates are quite attractive as they are set for a specific number of years, in the case of a 5/1 ARM it is set for the first 5 years at a low or “teaser” rate that is very attractive and generally lower than a fixed mortgage, however after the initial “fixed” rate time frame it will periodically adjust in response to the treasury bill rate or the prime rate. The initial low rate is a very attractive and that incentive provides the “teaser” for the potentially higher rate to come as it potentially adjusts and increases your monthly payment. Generally these adjustable rate mortgages have a “ceiling rate” that would be the maximum rate it could achieve and that offers some protection against a potential run away upswing in interest rates. 

In my opinion Adjustable Rate Mortgages only make sense, in our current low fixed rate climate, if you are positive you will only have the mortgage for less than the initial fixed rate time frame. If you believe you will remain in the house for the long term, go with the fixed rate and enjoy the benefits of what is again, near historical low rates and not have to worry about potential market fluctuations. 

Dave Kimbrough
The Kimbrough Team

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