Refinancing an adjustable-rate mortgage to get a fixed rate

If you are among the millions of homeowners with an adjustable-rate mortgage, you may be facing increasing interest rates as the loan adjusts. Refinancing might be the solution to the problem.

Homeowners refinance for a variety of reasons, including taking cash out of their home's equity to make home improvements, consolidating debt and to obtain a more favorable interest rate.

However, many Americans are now refinancing primarily to move from an adjustable-rate to a predictable, fixedrate mortgage to avoid future interest rate adjustments.

"There are many factors to consider when refinancing your mortgage depending on your particular situation," says Jim Ferriter, executive vice president for GMAC Mortgage. "If you have been living in your home for several years or if you're facing a rate reset on an adjustable-rate mortgage, you may find that refinancing pays for itself from the resulting lower monthly payment or from feeling the comfort of having a fixed monthly payment."

Here are some tips to help determine whether refinancing is an appropriate option.

•Know the terms of the current mortgage. How often will the mortgage adjust? How much will it adjust? These are both important factors to consider when determining if refinancing is a viable option. Contact the lender regarding the terms of the loan to avoid any surprises when the mortgage adjusts.

•Think about how long you will live in the home. The longer you live in the home, the more money you can potentially save in interest costs from refinancing.

•Maintain a good credit score. A good credit score is one factor that could enable you to obtain more favorable financing terms. Paying bills on time and keeping credit card debt low are easy ways to maintain good credit. Check your credit report every year to ensure there are no negative marks on the credit history, such as missed credit card payments or large account balances.

•Determine refinancing costs. Consult a loan officer to figure out what fees are involved with refinancing. An application fee may be required as well as closing costs. You may also choose to pay discount points to buy down the interest rate. By knowing the up-front costs for refinancing, you can determine exactly how much time it will take to recover the expense.

•Roll-in refinancing. Avoid paying fees up front and immediately enjoy lower monthly payments by rolling in closing costs into the new loan. Rolling in the costs is particularly appropriate if you will sell your home or refinance again in a few years, because having a higher loan balance will likely matter less than being able to enjoy the immediate benefit of lower monthly payments.

Every homeowner has a different scenario for determining if refinancing is a good option. Here's the bottom line: It might make sense to refinance if you have the opportunity to save money by lowering the cost of the monthly payment or the opportunity to seek the comfort of knowing that the mortgage payment will remain fixed.

This story is provided by North American Precis Syndicate Inc.