I have spoken to a few people recently who are in adjustable rate mortgages who were interested in refinancing, until they got “that” notice in the mail, that on their first adjustment, their interest rate was about to drop. That’s right, their dreaded adjustable rate mortgage was about to go down in rate.
Wow. Who knew? Happy days.
But to stay in that ARM right now is not a good idea. Here’s why:
Your ARM is probably tied to the LIBOR index. When it adjusts, the fixed Margin (say, 2.25 or so) is added to the Index to produce your new rate. So, right now, ARM’s are in good shape. As they adjust, they are all going down.
Look at the very end of that chart. We are now seeing an uptick in the LIBOR after a very long down-trend. So this year when your ARM adjusts, you will see rates drop. And if the LIBOR rises slowly and steadily, then next year you will see your rate rise a little, but possibly not even to the original start rate that you locked at when you took on the loan.
But the year after that…well, just add a Margin of 2.25 to the LIBOR where it was in early 2006, at nearly 6%. That would be a rate of 8.25% for the following year. Ouch!
And as short term rates such as the LIBOR march upward, long term rates – read 30 year fixed rates – will have to move upward as well. At that point, it will be too late to refinance with the savings you could realize by fixing your rate now.
So, if you are in an ARM that will adjust soon, here’s what I would do:
- If you plan on selling and moving in the next two years, then stay put, keep your ARM, and enjoy the low rate.
- If, on the other hand, you are sure you will move in the next 5-7 years, then I would definitely refinance now, and would highly consider another 5- or 7-year ARM. Fix the rate in during that period of time in the 3′s. Or, a fixed rate in the 4′s if you have any doubt about the time-frame for moving.
- However, if this is your home, and you are staying and paying it off, then hands down I would lock in a fixed rate in the 4′s right now, and never look back.
So, don’t be lulled by short term low rates. Think of the bigger picture and pull the trigger, if it needs to be pulled.