Refinancing on mortgages urged by lenders as rates go up

Customers with ARM loans are encouraged to refinance at a fixed rate

The lending market is a volatile one; what works today might be a poor idea tomorrow. Lenders need to keep their products flexible in order that they might meet the ever changing needs of their customers. During the last three years, mortgages have been at or near historic lows in terms of the interest rates. This would ordinarily suggest that people would lock into fixed-rate loans. But the low rates also spurred a huge wave of buying, which drove prices up tremendously during the same period. As housing prices increased faster than inflation and salaries, buyers flocked to adjustable rate mortgages.

And they are not flocking to ordinary adjustable mortgages, either. Many customers took out interest-only loans and Option ARMs, which came with “teaser” interest rates as low as 1%. This allowed them to buy the most house for the lowest monthly payment. And it worked, for a while. But now, it appears that interest rates are rising, and home sales are off. And when home sales are off, it means that times are harder for the lending industry, which likes to keep the loans flowing.

What to do? Encourage people to refinance!

With the rates going up and so many customers holding adjustable rate loans that are sure to adjust higher quickly, lenders are rushing to encourage their customers to refinance now at a fixed rate.  Depending on the loan, this might be a good time to do it. The difference in interest rates between the typical ARM and a 30 year fixed rate mortgage is now less than 1%, which takes away most of the advantage of having an adjustable loan. Worse, as rates increase, the adjustable rates will probably move more than will the fixed rate products.

Of course, the lenders aren’t just looking out for their customers’ pocketbooks. While it does make sense for some people to refinance, it makes more sense for lenders to encourage it. Each time someone refinances a loan, the lender takes in additional closing costs, which typically run about 2% of the loan amount. Even if no property is changing hands, these costs provide some revenue for the lender, as does the continued servicing of the loan. It is far better for the lender to encourage a customer to refinance and stay with that lender than to watch the homeowner refinance elsewhere.

Whether or not refinancing an adjustable rate mortgage makes sense for any particular buyer depends upon that buyer’s circumstances. The biggest question mark is how long the buyer intends to remain in the home. The costs of obtaining the new loan have to be spread over the amount of time that the homeowner remains on the property. The longer he or she intends to stay, the more sense it makes to refinance.

Those who intend to stay in their home for less than five years are probably better off keeping their existing financing product. If you have questions about what might be best for you, you may consider having a meeting with your lender. He or she can present available options to you and show you whether or not it will be in your best interests to obtain a new loan.