Is your mortgage scheduled to adjust this season? You may want to let it. This year’s ARM-holding homeowners in Sacramento are finding out that an adjusting mortgage may be the simplest way to get access to today’s low mortgage rates — without paying the closing costs.
Currently, conventional adjustable-rate mortgages are adjusting to near 3.00 percent.
If your home is financed via an adjustable-rate mortgage, you’re likely aware of your loan’s life-cycle. At first, your ARM’s initial mortgage rate is agreed upon between you and your lender, a rate that both parties agree will remain in place from anywhere from one to 10 years, with periods of five and seven years being most common.
Then, after the initial “teaser rate” expires, the mortgage’s mortgage rate adjusts according to a pre-determined formula — one that’s also agreed upon at closing. The loan is then subject to an identical mortgage rate adjustment every 12 months thereafter until the loan is paid in full.
The most common conforming mortgage adjustment formula is to add 2.25 percent to the then-current 12-month LIBOR rate.
Today’s 12-month LIBOR is 1.05% so, as a real-life example, an adjustable-rate mortgage that’s leaving its teaser rate period this week would adjust to 3.30%. (You take the margin of 2.25% + the index 1.05% = 3.30%)
If you’re a homeowner who took a 7-year ARM in 2005, or a 5-year ARM in 2007, your newly-adjusted mortgage rate should be roughly 2 percent lower than your initial teaser rate. On a $250,000 mortgage, a 2 percent mortgage rate reduction yields $298 in monthly savings.
Therefore, if you have an adjustable-rate mortgage that’s due to reset, don’t rush to refinance it. For at least one more year, you can benefit from low mortgage rates and low payments.
If you would like help reading your loan terms (the note and ARM rider), send me a copy and I will send you a cost-benefit analysis – comparing your adjusted ARM to a current fixed program.