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FINANCE

Interest rate hikes: Can you refinance an adjustable-rate mortgage?

Refinancing involves replacing your existing mortgage with a new one with the goal of obtaining better terms but comes with risks.

Refinancing involves replacing your existing mortgage with a new one with the goal of obtaining better terms but comes with risks.
CARLOS OSORIOREUTERS

Refinancing your mortgage can be particularly beneficial if you want to lock in a stable interest rate and monthly payment, especially if you’re concerned about potential interest rate hikes in the future. With continued rate hikes expected until at least the end of the year, homeowners may be looking to secure their property amidst rising prices.

One option to achieve this could be switching from an adjustable-rate mortgage to a fixed-rate mortgage. Fixed-rate mortgages offer the advantage of predictable monthly payments over the life of the loan while adjustable rates can increase very quickly.

This has been clearly seen with the consistent rate increases since last year.

What is an adjustable-rate mortgage?

An adjustable-rate mortgage (ARM) is a type of home loan where the interest rate is not fixed for the entire duration of the loan, unlike a fixed-rate mortgage. Instead, the interest rate on an ARM can change periodically, typically after an initial fixed-rate period. At the beginning of the loan term, usually 5, 7, or 10 years, the interest rate is fixed and remains constant.

After the initial fixed-rate period, the interest rate on an ARM can start adjusting every year.

What to consider when looking to adjust your mortgage

When considering refinancing an adjustable-rate mortgage, there are a few factors to keep in mind.

Clearly the first move is to compare current interest rates with the rate on your existing mortgage. Refinancing often makes sense when you can secure a new rate significantly lower than your current one, thoguh this is unlikely with constant interest rate rises. What is more likely is that you want to secure the current rate before it goes up any higher.

Switching to a fixed-rate mortgage offers stability in your payments, while switching to an ARM might provide lower initial rates if you plan to move or refinance again in the near future.

Another factor to consider is whether you want to maintain the same loan term or switch to a shorter or longer term. Switching to a shorter term, from a 30-year to a 15-year loan for example, can lead to higher monthly payments but help you pay off the loan faster and save on interest over time.