When Should You Refinance to a Fixed Rate Mortgage?
When you refinance your mortgage, you replace your old loan with a new one with different terms. One of the changes you can make is switching your loan from an adjustable rate, where the monthly payments can change, to a fixed rate, where the monthly payments stay the same over the entire loan. There are a few situations when it can make sense to refinance to a fixed rate mortgage.
You’re Worried Interest Rates Will Go Up
The monthly payments on your adjustable mortgage change based on market interest rates. If rates go up, your payments will go up and they can go up quite a lot. In one year, your adjustable rate mortgage payments could increase by hundreds of dollars per month. If interest rates are low and you’re worried that they’ll go up in the future, it could be a good time to refinance to a fixed rate mortgage. That way you’ll lock in a low monthly payment and won’t have to worry about a price jump down the road.
You Want More Budget Stability
Budgeting with an adjustable rate mortgage can be tricky. Since your payments are changing all the time, it’s hard to calculate exactly how much money you’ll have every year. A fixed rate mortgage is much more predictable. Your loan payments stay exactly the same so you never get caught off by surprise changes. If you want more budget stability, a fixed rate mortgage could help.
You’ve Decided to Stay in Your House Long-Term
In general, adjustable rate mortgages are better than fixed mortgages when you stay in a house for short amount of time, less than seven to ten years. That’s because adjustable rate mortgages start out at a less expensive rate. However, over time the rate can adjust upward. Over many years, the total cost of an adjustable mortgage usually averages out to be more expensive than a fixed mortgage. If you’ve decided you want to stay in your house for ten or more years, you may want to refinance to a fixed rate mortgage so you can get these long-term savings.
Refinancing is a big financial decision and one you shouldn’t rush into. However, if you find yourself in some or all these situations, it’s probably a good time to consider refinancing to a fixed rate mortgage.