Your wealth management strategy shouldn’t just focus on investments. It’s also important to make sure your liabilities are working as hard as possible to support your financial goals.

Periodically reviewing your loan portfolio with your advisor is a key part of that effort, especially if you have an adjustable rate mortgage (ARM).

Assessing an ARM before its rate resets can help to identify ways to improve your future financial position. That’s particularly true when interest rates are rising or expected to rise in the future, because higher rates can lead to higher interest payments. Favorable market conditions, including higher real estate values, may also present an opportunity to improve the structure of your loan. While the Federal Reserve is currently evaluating raising short term rates, mortgage rates still remain near historic lows, providing clients continued opportunity to lock in long term fixed rate financing.

Rising rates aren’t the only reason to consider refinancing. As your life changes, so may your plans for how long you will stay in your home. The key is to align the tenor of the fixed period of the mortgage to the length of time you’ll need the proceeds. For example, if you’re sending a child off to college in the near future, you may plan to downsize as well. In that case, a loan with a shorter fixed period makes sense. On the other hand, if a child decides to delay college or move back into your house after graduation, it may make sense to look for a product with a longer fixed period.

Rates Are Still at Historic Lows

To this point, average jumbo mortgage rates have remained historically low. However, a rising rate environment could reverse that trend. And if your ARM resets after rates climb, you could end up paying substantially more in interest.

To see if a refinance is worth it, compare the total long-term cost of the refinanced loan with the cost of your current mortgage. Consider scenario 1 below of a $1MM 5-year ARM, three years through its fixed period. A borrower who refinances that mortgage to a 7-year ARM today assuming the same rate, may be able to save over $72,000 throughout the fixed-rate portion of the new loan.[1] Your PNC Banking Advisor can assist in calculating the breakeven period for recouping closing costs and the net worth impact for various product structures and rates. You may be able to further lower your rate through our Jumbo Mortgage Relationship Pricing program if you hold aggregate deposit and investment management assets of at least $500,000 with PNC Private Bank.[2]

Table 1: Scenario 1

    Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
 

Rate

3.125%

3.125%

3.125%

3.125%

3.125%

5.125%

5.125%

5.125%

5.125%

5.125%

Original* Mortgage Payment

$4,283.75

$4,283.75

$4,283.75

$4,283.75

$4,283.75

$5,274.26

$5,274.26

$5,274.26

$5,274.26

$5,274.26

          Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
  Rate      

3.125%

3.125%

3.125%

3.125%

3.125%

3.125%

3.125%

Refinanced** Mortgage Payment      

$4,102.58

$4,102.58

$4,102.58

$4,102.58

$4,102.58

$4,102.58

$4,102.58

Annual Savings/Costs         $3,254.04 $3,254.04 $15,140.16 $15,140.16 $15,140.16 $15,140.16 $15,140.16
Closing Costs         ($10,000.00)            
Cumulative Savings/Costs         ($6,745.96) ($3,491.92) $11,648.24 $26,788.40 $41,928.56 $57,068.72 $72,208.88

*The “original mortgage” example assumes a $1MM 5-year ARM originated at 3.125% with no points. The adjustable rate cap structure is 2/1/5, meaning the interest rate can adjust by a maximum of 2% at the initial rate reset upon expiration of the 5-year fixed period, and thereafter at a maximum of 1% biannually, with a maximum adjustment of 5% over the life of the loan. This example uses estimated future interest rates. After the initial adjustment, the original loan uses an interest rate based on 6-month SOFR, for purposes of this example, assumed to be 2.125% in “Year 6,” with a margin of 3% is added thereto, resulting in a new interest rate of 5.125% in “Year 6.” This example assumes market rates will be generally flat through "Year 10," however, rates can change at any time.

**The “refinanced mortgage” assumes the refinance of the remaining principal balance at the end of year 3 of $936,695.92 balance using a 7-year ARM at 3.125% with 5/1/5 rate cap structure and no points. The example also assumes $10,000 in closing costs. (Actual closing costs vary by geography, loan size and terms.)

This is not an offer to lend. Actual loan terms may differ from those illustrated.

The Argument Against Waiting

It may be best to refinance before mortgage rates rise. If you wait to refinance until rates have jumped, you might miss your chance to lock in today’s low rates. 

Of course, identifying the best way to take advantage of a refinance depends on your unique situation—how long you’re planning to stay in your home, your overall tax situation and your financial goals. 

Your PNC Banking Advisor can help you determine the best way to align your home financing with your goals and objectives.

For more information, please contact your PNC Private Bank advisor.