ARM Interest Rates Adjusting Soon May Be Good News For Homeowners
ByThis is part 2 of the series, the first part is: Not Time to Refinance Your Home
Future Interest Rates With Adjustable Rate Mortgages or ARM
Right about now, when you are starting to feel better, someone will throw in your face the fact that even if your rate is good, IT COULD GO UP AT ANYTIME. That, is the second thing that is different.
Mortgage companies and customers found that changing the interest rate every month was a hassle for everyone and only created more opportunity for errors and losses both for lenders and borrowers. Almost every ARM adjusts on set periods. The most common is a mortgage loan that adjusts once per year.
In other words, if our ARM started adjusting today, we would lock in a low rock-bottom 3.25% interest rate for a full year.
What if interest rates do rise?
They will, you can count on that. When, and how fast, is another question. However, consider that everyone still considers the economic recovery that we seem to be having (or may not be having, no one is really sure) is very fragile. The last thing the Fed wants to do is raise interest rates too far, too fast, and kill off the economy again. You can expect them to be erring on the side of NOT raising rates for once.
When they do start raising rates it will be done slowly. The first rate increase will almost certainly be 0.25%. When that happens, mortgage rates will rise too. If you like, you can go refinance that day. It should be much easier to get a mortgage since that interest rate increase will come because the economy, and the banks, are doing better, so there will be less fear in lending. Assuming the 30-year fixed rate jumps a full 0.75% on the news, compare that to what your current non-adjusted rate is.
On the 5-year note, we have, it is 5.125%, that is roughly what interest rates might be AFTER the Fed starts raising them. So, there is really no downside even if rates do go up, and no one is expecting them to go up much soon.
Of course, you might not want to refinance even if the Fed does start raising rates. Why?
Because most adjustable mortgages include clauses defining the maximum amount the interest rate can go up during any one adjustment period (in our case, one-year). In our case, the rate can never change by more than 2% from the previous year. That means that if we did get locked in at 3.25%, the highest our interest rate could possibly rise to next year would be 5.25%. Again, compare that to what you could refinance to today with no fees and no closing costs.
In other words, we would be set from now until June 2011 without the possibility of our interest rate increasing any amount that would justify refinancing. In fact, through June 2012, we are guaranteed to not pay anything higher than 7.25%. That isn’t rock-bottom, but hardly sky-high either.
Refinancing will cost you a couple thousand dollars in fees most likely which means it could take years to break even once the rate you have locked in for 30 years is actually lower than would you could have by not refinancing. Again, by way of example, if we could get something like a 5.0% 30-year fixed mortgage for just $2,000 worth of TOTAL costs including any administrative fees or charges, it would be June 2012 before we started saving any real money on our monthly payments. It could be 2014 before we started coming out ahead.
So, while not refinancing guarantees us a low-cost mortgage through June 2011, and an average mortgage through June 2012, actually refinancing can’t even POTENTIALLY offer us any advantage until at least 2014!
Can you guarantee that your job, desired home location, family size, and lifestyle will stay the same through 2014? Me, neither. We won’t be refinancing.
(Just for full disclosure, the Note I’m referencing actually adjusts at the end of 2009 making this a slightly bigger gamble, but still a pretty safe bet. No one expects rates to rise much between now an the end of 2009.)
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