Should You Refinance Your ARM, Or Let It Adjust Lower?
If your adjustable rate mortgage is due to adjust this year, don’t go rushing to replace it just yet. Your soon-to-adjust mortgage rate may actually go lower. It’s related to the math behind the ARM.
Conventional, adjustable-rate mortgages share a common life cycle:
- There’s a “starter period” in which the interest rate remains fixed
- There’s an initial adjustment period after the starter period called the “first adjustment”
- There’s a subsequent annual adjustment until the loan’s term expires — usually at Year 30.
The starter period will vary from 1 to 10 years, but at the point of first adjustment, conventional ARMs become the same. A homeowner’s new, adjusted mortgage rate is determined by the sum of some constant, and a variable. The constant is most often 2.25% and the variable is most often the 12-month LIBOR.
As a formula, the math looks like this:
(Adjusted Mortgage Rates) = (12-Month LIBOR) + (2.250 Percent)
LIBOR is an acronym standing for London Interbank Offered Rate. It’s the rate at which banks borrow money from each other and, lately, LIBOR has been low. As a result, adjusting mortgage rates have been low, too.
Last year, 5-year ARMs were adjusting to 6 percent or higher. Today, they’re adjusting to 3.375%.
Based on the math, it may be wise to just let your ARM adjust this year. Or, depending on how long you plan to stay in your home, consider a refinance to a new ARM. Starter rates on today’s adjustable rate mortgages are exceptionally low , as are the rates for fixed rate loans.
Either way, talk to your loan officer about making a plan. With mortgage rates as low as they’ve ever been in history, homeowners have some interesting options. Just don’t wait too long. LIBOR — and mortgage rates in general — are known to change quickly.
Related posts:
- Your ARM Is Adjusting Lower. Is There A Downside To Letting It?
- Don’t Rush To Refinance That ARM — It May Be Adjusting To 3 Percent Or Lower
- Adjustable Rate Mortgages Adjusting To 3.000 Percent Right Now
Michael Haigh has 20+ years of professional experience in the banking and mortgage industry. He has the knowledge, education, and dedication to get you the best loan for your situation, answer your questions honestly and completely, and make your mortgaging experience a pleasure. His reputation includes being the number one lender in the country for CitiBank for 9 years, then at Chase for 1 year and now with WJ Bradley since August of 2009. This is because of the quantity of loans, myriad of people he's helped, and his dedication to helping his clients find the perfect loan for them.
