Time To NOT Refinance Your Mortgage
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The world of adjustable-rate mortgages isn’t very old when it comes to the general population. Sure, the product has been around for a long time, but it wasn’t until late in the 1990s that it turned into the kind of thing your average neighbor would have. That lack of age also means a lack of experience.
So when media outlets start reporting about “Black Wednesday” when mortgage interest rates shot up, and then follow up it up with “news” asking if homeowners who didn’t refinance already have missed the boat and wondering if there will ever be lower interest rates again, the average person starts to worry.
Many homeowners are doing the wrong thing right now, or are up nights worrying about something they don’t need to worry about just yet, because now might just be the perfect time to NOT refinance your mortgage.
With the economic recession and collapse of the banking industry, as well as the drying up of the credit markets, the Federal Reserve Board (FED) has cut it target short-term interest rates to near zero—officially 0% to 0.25%. Doom and gloom headlines about socializing banks, Chrysler and then GM bankruptcies and of course, plenty of stories about how bad the lending business is may have put the silver lining about your adjustable rate mortgage in your blind spot.
If you have an adjustable rate mortgage that will start adjusting it’s interest rate in the near future, you may have been waiting with dread for that date to arrive. This likely applies to you if you picked up a 5-year ARM toward the end of the real estate bubble, or a 7-year ARM or 10-year ARM earlier on.
The conventional wisdom has always been to refinance out of your ARM before the interest rate begins adjusting. The idea is that you don’t want your mortgage interest rate behaving like a credit card interest rate and changing your mortgage payment every month. But, two things have changed so much that the conventional wisdom might actually steer you down the wrong path.
ARMs Adjusting Interest Rate Lowest Ever
While the Fed has struggled to keep long-term interest rates on new mortgages as low as it would like, it does not have that problem in one area. Most existing ARMs are tied to interest rate index. Usually, the adjustable rate mortgage interest rate is equal to that index plus a specified amount. The index your interest rate is tied to and the interest rate spread added to that rate are spelled out in your mortgage documents, or more specifically, in your “Note.”
For example, a 5-year adjustable rate mortgage we have on a property is set based on the weekly yield on the United States Treasury securities adjusted to a constant maturity of one year. That sounds like a nightmare, and it probably is if you actually have to calculate it buy you don’t since the Federal Reserve Board publishes that number daily.
The United States Treasury Securities Adjusted to Constant Maturity of One Year index is 0.50%. Actually, it fluctuates daily and for the end of May was 0.49%. It’s been lower the first few days of June, not higher.
In other words, on this particular mortgage, if our interest rate were to adjust today, our new adjustable interest rate would be 3.25%. I dare you to find a mortgage you can refinance into with that interest rates with no closing costs or loan fees of any kind, because when it comes to a mortgage you already have, you pay zero fees, with no fine print!
What if mortgage rates go up after you decide not to refinance
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