With the first quarter of 2014 coming to a close, I wanted to take a minute and discuss a shift we have been seeing within the industry. As we phase out of the “extremely” low rates and transition to a “low” rate environment, a few changes are starting to take place. It is safe to say the days of a 3.5%, 30-year fixed rate that we saw in 2011 and most of 2012 are long gone. As rates have shifted, many homeowners are no longer going down the refinance path – and rightfully so. However, that doesn’t always mean refinancing would put you in a worse position.
We all know that life changes happen and, in some cases, the security of a 30-year fixed rate may no longer be required. With 5-1, 7-1 and 10-1 ARM rates remaining low, homeowners still have the potential to save money through a refinance. This also doesn’t give up all the security that a homeowner may have. The “5” in a “5-1” simply means how long the rate will be fixed before it starts to adjust. The same holds true for the “7-1” and “10-1” Arm programs. For example, a homeowner may currently have a 3.875% 30 year fixed rate. However, a life event occurred which has put them in a position in which they know they will be selling their home in the next 5 years. In this situation, a homeowner may look at refinancing into the 5-1 Arm program at, to estimate, 2.875% and save money for the time frame between now and when they move. They will still have the security of the fixed rate for the next 5 years and, after that, their loan could adjust.
If a client is certain they will be selling in 5 years then they don’t need the remaining 25 years of their loan to be fixed. It’s important to remember that the days of a one-size-fits-all mortgage are long gone. Each homeowner should review their situation on a case-by-case basis and keep in mind that life events or changes in their long term plan may warrant a mortgage review -similar to a financial planner making adjustments to a retirement plan based on expected retirement age. I always recommend home owners revisit their mortgage situation when their overall financial picture changes over the years.