WHAT SHOULD I DO ABOUT MY ADJUSTABLE RATE MORTGAGE?
That is a question a great many home owners are now asking themselves amid the confusion and chaos created by America’s latest “bubble”. About five years ago, when real estate prices started to soar, prospective buyers took advantage of low-rate ARMs as an easy way to access the great American dream of home ownership.
The Great American Dream
At the same time, mortgage rates were flirting with historic lows, allowing lenders to offer more interest-free loans and OPTION ARMs that permitted borrowers to make low minimum payments. While many borrowers said they would take the lower interest rate and put extra money aside to offset the higher payments later, most did not.
The ARM tsunami
The short term indexes to which ARMs are tied have moved up sharply as the Federal Reserve has tightened credit. Of the ARMs to be reset later this year, probably half of them will be refinanced, a veritable “ARM tsunami”.
What can you do in preparation?
Pull out the contract you signed and calculate how much your loan will be readjusted. You will need to know the index your ARM is based upon (such as the one-year Treasury, the 11th District COFI, or LIBOR), the current rate on the index, and the margin that will be added. The only information your contract won’t contain is the latest index rate, but you can get that from HSH Associates Financial Publishers (hsh.com). One bright note: Most ARMs have an annual cap, often two percentage points.
Do the numbers first.
When you have the numbers, including your latest balance, you can estimate your new payments. Say you have a 5/1 ARM (a fixed rate for five years and then it automatically converts to a one-year ARM) you took out in late 2002 at 5.2% for $240,000. Your current principal and interest payment is $1,318 a month. At the end of this year, assuming an annual cap of two percentage points, your rate will jump to 7.2%, upping your monthly payment to $1,588 on the remaining loan balance of $220,647.
Should you refinance?
If you are planning to sell soon after the adjustment, refinancing may not be worth the cost and the headaches. However, if you are planning to stay in your home for awhile, you would probably be wise to lock in a fixed rate now while rates are still fairly low. They should remain below 6.5% for the rest of the year. If you refinanced to a 30-year fixed mortgage at 6.3% on the $220,647 loan in the above example, your monthly payment would be only $1,370, assuming you don’t finance the closing costs.
Your mortgage consultant can help you determine whether refinancing your ARM with a fixed-rate loan makes sense for you.
I do loans in addition to real estate for the convenience of my clients and friends. I am a loan officer with L&G Mortgage, a local ( Scottsdale ) company (which is helpful!) and gives great rates and service.
It’s very easy. It’s all online (www.lgmortgagebanc.com) and I can walk you through the process. Then you talk to the underwriter directly and become fully approved contingent upon providing the agreed upon documents.
I have helped many fully satisfied clients, so if you feel it’s appropriate, give me a call (928 300 5050).
View Sedona
Real Estate Newsletter Archives
|
