What Are The Risks Of Adjustable Rate Refinancing?

By Kevin Landis

When looking to refinance their mortgage, many people are attracted to adjustable rate mortgages (ARMs). There are various benefits of selecting adjustable rate refinancing, the most significant of which is an initial lower interest rate. While there are various advantages of selecting an adjustable rate refinanced mortgage, there are also several risks that must be taken into consideration.

Interest Rate Hike

The primary risk of adjustable rate refinancing that must be taken into consideration is the risk of interest rate hikes. When you get an ARM the initial low interest rate is only available for a few years. Once the initial interest rate period is over, your interest rate could easily increase dramatically. When your interest rate increases, your mortgage payments could increase to the point where they are no longer affordable for you.

Forced Refinance or Sale

The second risk of adjustable rate refinancing that must be taken into consideration is the risk that you will be forced to refinance your mortgage again. If your interest rate increases to the point where it is no longer affordable, you will be forced to either sell your home prematurely or refinance your mortgage. Neither of these situations are ideal as the fees associated with each situation are quite expensive.

More Fees

The third risk of adjustable rate refinancing that must be taken into consideration is more fees. Adjustable rate mortgages over time have shown to be riskier ventures for a bank. Since banks offer lower interest rates on these products, most banks must charge higher fees to compensate for the risk that they are taking on. Fees for adjustable rate mortgages at time may be double of those for fixed rate mortgages.

What Are The Risks Of Adjustable Rate Refinancing?

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