When you went through the stages of new home purchasing years ago and decided on an adjustable-rate mortgage, you might now be considering other home equity loans. If you want to refinance your loan but you’re not sure about how to go about it, or if you should even consider it, you have come to the right place.
We’re going to discuss everything you need to know about mortgage refinancing an adjustable-rate mortgage in Michigan. After reading what we have to say, you will hopefully be able to make an educated decision about if you should stay with an adjustable-rate mortgage or switch to a fixed-rate mortgage.
What Exactly Is An Adjustable Rate Mortgage?
If you’re a bit rusty on what an adjustable-rate mortgage is, fear not, as we are going to refresh your memory. An ARM is a home loan with an interest rate that adjusts periodically throughout your 30-year loan term.
Usually, during the introductory period of your ARM (usually 5, 7, or 10 years), your ARM will maintain a low fixed interest rate. However, your ARM loan’s interest rate will become adjustable or variable once your initial introductory period has ended. This means the interest rates will rise or lower according to market trends.
What Is A Fixed Rate Mortgage?
Do you want to refinance your adjustable-rate mortgage loan to a fixed-rate mortgage in Michigan? Well, if so, you will first need to know a little more about it so that you can determine if it’s the right move.
A fixed-rate mortgage is far more predictable for homeowners because it is less complicated and has fewer moving parts. Unlike an ARM loan, a fixed mortgage loan has an interest rate that remains stable or fixed throughout the life of the loan term. This means that if you have a loan term that is 30 years and it’s a fixed-rate mortgage, the interest rate won’t ever change.
However, you could experience price variations from year to year depending on homeowners insurance increases and property taxes. Essentially if you want a solid interest rate instead of one that fluctuates, you might want to consider refinancing your ARM loan to a fixed-rate mortgage.
How To Refinance From An Adjustable Rate Mortgage To A Fixed Rate Mortgage
If you have decided you want to refinance from an adjustable-rate mortgage to a fixed-rate mortgage, you’re likely wondering how to make the change. Fortunately, refinancing from an ARM to a fixed-rate mortgage is not a complex or difficult process. In fact, it’s similar to the processes you completed when initially buying your home in Michigan.
First things first. You need to understand that when you refinance an ARM, you will be taking out another loan. This loan (fixed-rate or other equity home loan) will be used to pay off your original loan.
Once your original mortgage is paid off, you will be making payments on your new loan. Luckily, you won’t need to apply for this loan from the same lender, so you can choose a mortgage lender that offers a fair interest rate.
After choosing your lender, you can then apply for your fixed-rate mortgage. However, you need to note that your bank will be required to review your finances to ensure you are able to pay the new mortgage.
Often your bank will consider your credit score, debts, assets, and income. For them to verify your income information, you will need to provide W2s, bank statements, and pay stubs, but this process differs if you’re self-employed. Yet, fear not, as you can verify your income by providing two years worth of profit and loss statements and federal tax returns.
What Are The Requirements For Refinancing Your ARM?
It’s true that each mortgage lender is going to have its own rules (us included) when it comes to refinancing an adjustable-rate mortgage to a fixed-rate mortgage. However, there are a few general mortgage loan refinance requirements you will likely have to meet. Have a look below to learn what they are.
- Home equity: Usually, you will need to have a home equity rating of 20% or higher.
- Debt to income ratio: Your debt to income ratio often has to be less than 50%.
- Length of homeownership: Often, you will need to have owned your home for a minimum of six months.
- Credit score: Your credit score has to be 620 or higher (in some instances, it can be 580 if you’re backed by the Federal Housing Administration).
Refinancing Your Adjustable Rate Mortgage: When To Consider It
So when should you refinance your ARM? Well, the answer to this mortgage question will largely depend on your circumstances, wants, and preferences. To help make the deciding process easier for you, we have listed when you might want to consider refinancing your ARM.
- When you have good home equity of higher than 20%, and you want to cash out your home to undertake projects, consolidate debts, improve your credit score, or pay for higher education.
- When you want to enjoy the benefit of a lower interest rate that comes with having a stable or fixed-rate mortgage.
- When you need to remove a person from your mortgage in the event of a divorce.
- When you’re reaching the end of your ARM introductory period and want to avoid having to pay increased interest rates.
Ultimately, it will depend on you if you want to refinance your adjustable-rate mortgage. If you meet the loan requirements we spoke about and speak with a mortgage lender to decide if refinancing your ARM to a fixed-rate mortgage is beneficial, you should encounter no problems.
When you’re ready to refinance your adjustable-rate mortgage, you should consider speaking with one of the consultants at Loan X Mortgage. We can work alongside you to guide you through the refinancing process and help you get the best interest rate possible.