Mortgage News in the Carolinas
Posts tagged Adjustable Rate Mortgage
Adjustable-Rate Mortgages Starting To Adjust Higher
0147 days
by Geoff Brown
in Mortgage Rates
For the first time in a year, homeowners with adjusting mortgages are facing rising mortgage rates. The interest rate by which many adjustable-rate mortgages adjust has climbed to its highest level since September 2010, and looks poised to reach higher.
This is because of the formula by which adjustable-rate mortgage adjust.
Each year, when due for a reset, an adjustable-rate mortgage’s rate changes to the sum of fixed number known as a “margin”, and a variable figure known as an “index”. For conforming mortgages, the margin is typically set to 2.250 percent; the index is often equal to the 12-month LIBOR.
LIBOR stands for the London Interbank Offered Rate. It’s a rate at which banks lend to each other overnight.
Expressed as a math formula, the adjusting ARM formula reads :
(New Mortgage Rate) = (2.250 percent) + (Current 1-Year LIBOR)
LIBOR has been rising lately, which explains why ARMs are adjusting higher as compared to earlier this year. There has been considerable stress on the financial sector and LIBOR reflects the uncertainty that bankers feel for the sector.
LIBOR last spiked after the collapse of Lehman Brothers in 2008 amid global financial fears. Analysts expect LIBOR to rise into 2012 because of bubbling concerns in the Eurozone.
Despite LIBOR’s rise, though, most adjusting, conforming ARMs are still resetting near 3 percent. For this reason, homeowners with ARMs in Carolinas may want to consider letting their respective loans adjust with the market.
This is because an adjusting mortgage rate near 3 percent may be better than what’s available with a “fresh loan” — even as 5-year ARMs rates make new all-time lows. Unlike a straight refinance to lower rates, an adjusting loan requires no closing costs, requires no appraisal, and requires no verifications.
So, if you have an adjustable-rate mortgage that’s set to reset this season, don’t rush to refinance it. Talk to your lender and uncover your options. Your best course of action may be to stay the course.
Should You Refinance Your ARM, Or Let It Adjust Lower?
0574 days
New clients will often call me about refinancing their adjustable rate mortgage. I tell them 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 in Charlotte , 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.
