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

Have a Question? Ask Dave!

With rising interest rates should I buy a home now instead of waiting until the summer?

Dave,

I’m planning the home buying process this summer, but I’ve noticed that mortgage interest rates have been slowly rising for the past couple of months. A friend mentioned that with higher interest rates I won’t be able to qualify for as large of a mortgage as I would be able to with lower interest rates and it really got me to thinking. Should I speed up my timeline to this spring so I can purchase a home I really love instead of compromising for something in a lower price range?

Dale, Fruita

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Dale,

Yes, if you are concerned about rates going up then you should speed up your timeline! I know they have ticked up a bit over the past couple months, but mortgage rates are historically still VERY attractive and I don’t expect them to move aggressively over the next 3-4 months, but every ¼ point does add up! As the economy gets stronger, rates will continue to work their way up and the days of really cheap money are over. The real concern is what I call the “double whammy”. This is where rates are going up at the same time home prices are going up, which leads to home affordability really getting pinched.

If you can move your time line up a bit, it’s probably a good idea to help ensure you get in on the lowest rate possible, because I don’t anticipate them going down again anytime soon. Lastly, try not to settle for something you don’t love! Loving where you live is a real gift and we encourage all our customers to make that their primary goal, regardless of their price range. Best of luck.

Dave Kimbrough
The Kimbrough team