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 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. In 2018, the Federal Reserve boosted its target short-term interest rate to a range between 2.25% and 2.5%, and while most recent expectations of near term rates have tempered, locking in today’s low rates for a longer period of time may help you avoid the impact of future rate increases.

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 despite the recent change in the rate environment, currently resting at slightly lower levels than early 2018. 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 5/1 ARM, three years through its fixed period. A borrower who refinances that mortgage to a $1MM 7/1 ARM today assuming the same rate may be able to save over $49,000 throughout the fixed-rate portion of the new loan.

Refinancing to a higher rate may also save you money in the long-term. Consider the same original mortgage in Scenario 1, but the borrower refinances to a $1MM 7/1 ARM at a slightly higher rate (see Scenario 2 below). They will still save over $37,000 throughout the fixed-rate portion of the new loan.

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. 

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[1] 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      

3.375%

3.375%

3.375%

3.375%

3.375%

3.375%

3.375%

Refinanced Mortgage[2] Payment      

$4,283.75

$4,283.75

$4,283.75

$4,283.75

$4,283.75

$4,283.75

$4,283.75

Annual Savings/Costs         $0.00 $0.00 $11,886.01 $11,886.01 $11,886.01 $11,886.01 $11,886.01
Closing Costs         ($10,000.00)            
Cumulative Savings/Costs         ($10,000.00) ($10,000.00) $1,886.01 $13,772.03 $25,658.04 $37,544.05 $49,430.07

 

Scenario 2

    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[1] 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      

3.375%

3.375%

3.375%

3.375%

3.375%

3.375%

3.375%

Refinanced Mortgage[2] Payment      

$4,220.96

$4,220.96

$4,220.96

$4,220.96

$4,220.96

$4,220.96

$4,220.96

Annual Savings/Costs         ($1,646.49) ($1,646.49) $10,239.52 $10,239.52 $10,239.52 $10,239.52 $10,239.52
Closing Costs         ($10,000.00)            
Cumulative Savings/Costs         ($11,646.49) ($13,292.98) ($3,053.46) $7,186.06 $17,425.58 $27,665.11 $37,904.63
The above scenarios are for illustrative purposes only.