Refinancing Out of An Adjustable Rate Mortgage -
is now the time?
With rates constantly in flux, it may be a good idea
to start weighing your options. Interest rates have
bounced around considerably during the past few years
and now could be the time to lock in on a fixed-rate
mortgage or refinance into another short term ARM.
Often times there is very little difference in rate
between longer term ARM products and fixed rate loans.
Thus, it may make 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?
Many 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. Thats right, your rate may adjust from
3.75% to 9.75%.
What will these adjustments do to your monthly payment?
Lets 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 principal and interest payment for the
first three years would be approximately $1,250.
Now, lets 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 + Loans 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.
Research
current fixed rate and adjustable rate loans online.