Is now the time to refinance out of your adjustable
rate mortgage?
|
| With rates on the rise, it is good idea to start weighing your
options. Interest rates have gone up considerably during the past few months
and now could be the time to lock in on a fixed-rate mortgage or refinance into
another short term ARM. Currently, there is very little difference in rate
between longer term ARM products and fixed rate loans. Thus, it makes very
little sense to consider ARMs greater than five years in length unless you plan
to pay points to buy down to a lower rate. There is no doubt that adjustable
rate mortgages serve a purpose and that they can be a great solution for
certain borrowers. ARMs are excellent for keeping payments low and freeing up
cash for other investments and obligations. However, consumers must keep track
of their loan and be ready to refinance it if necessary to ensure that they are
not in for a big surprise when their initial fixed-rate period ends. |
|
What will happen to your 3 or 5 year interest-only
arm when the first adjustment happens?
|
| Most adjustable rate mortgages have caps of 5/2/5, 6/2/6 or
2/2/6. This means that at the first adjustment, after three or five years, the
rate can go up 2-6 percent. That’s right, your rate may adjust from 3.75% to
9.75%.
|
| What will these adjustments do to your monthly payment?
|
| Let’s take a look at one example:
|
| In the spring of 2003, a borrower gets a $400,000 three year
interest-only arm with a rate of 3.75%.
|
| The monthly payment for the first three years would be $1,250.
|
| Now, let’s fast forward to spring 2006. The loan is ready to
adjust and the index that the rate is based upon has quadrupled in the past 24
months (from 1.08% to over 5.060%).
|
| Initial Rate: 3.75%
|
| New Rate (Current Index + Loan’s Margin) 5.060% + 2.75% =
7.810%
|
| The new payment will be based upon the fully indexed rate of
7.810% (The loan is then fully amortized - paying principal and interest) for
the remaining 27 years. |
| Your new payment would be $2,965.84 (more than doubled) and
your rate has gone up more than 100% from where you started. |
|
Wait….don’t panic and go running for the hills. AAXA
Discount Mortgage has many options available to you and you family to avoid
payment shock. Call us toll free at 877-RATE-LOW (977-728-3569).
|