Refinancing Out of An Adjustable Rate Mortgage -
is now the time?
Taken from AAXA Newsletter Article (2006)
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. 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 payment for the first three years would
be $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.
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).