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Refinance Considerations
Get a Fixed Rate
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5 of 10
Refinance Considerations
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The Menards made a shrewd move when they switched to a fixed-rate
loan. After their recent decline, rates are more likely to head
higher in coming years than they are to drop further. If you took
out an ARM in the past two years or so, you're probably paying 7.75%
to 8.5%. By switching to a fixed-rate loan today, you will not only
reduce your payment, you will also lock in an attractive rate for
as long as you own your home.
In fact, while one-year ARMs currently offer tempting introductory
rates averaging 5.59%, most experts recommend avoiding them, because
you could easily find yourself facing sharply higher payments in
the near future -- even if interest rates don't rise. Here's why:
After the introductory rate expires, ARMs are typically pegged to
the one-year Treasury rate (recently 5.25%) plus 2.75 percentage
points, with increases of as much as two points a year. Assuming
interest rates don't change, you would pay 7.59% in the second year
(the full two-point increase) and 8% in the third year.
There are certain cases, however, where an ARM makes sense. If
you are fairly certain you'll be moving within five years, you can
save some money -- and avoid rising payments -- with a five-year
ARM, recently averaging 6.62%. Such loans offer a fixed rate for
five years and adjust annually thereafter.
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