What To Do If You Have An Adjustable Rate Mortgage

Mortgage and Lending with Strategic Mortgage NMLS#160440

Right now there are mortgage borrowers with adjustable rate mortgages (ARMs) on which the rate has adjusted within recent years are currently enjoying extremely low interest rates.


This is a reflection of the unusually low levels of the rate indexes used by most ARMs. But of course the flip side of the equation is that adjustable rate loans are just that, adjustable and with interest rates expected to rise, the question for many borrowers is how long to stay in arm loan in the current market.


The first thing to understand is that ARM loans are based on indexes, such as the one year Treasury for instance plus a certain percentage called a margin.  Right now, with that index being below 1% and many borrowers margin between 2% and 3%, the interest rates that borrowers with ARM loans are paying are still below that of regular fixed rate loans in the marketplace.


However, over time, history tells us that the US Treasury and other Indexes will not remain low and interest rates in general will move higher. The process will of course occur over a period of time, which creates an opportunity for ARM borrowers to wait until the rate-increase process starts before making a move. That is easier said than done because history also tells us that the market can move very fast.


In the end it perhaps comes down to each borrower evaluating their circumstance and deciding what fits best for them.


If you are moving soon, refinancing will not benefit much

Borrowers with ARM mortgages, who plan to sell their home within the next year and a half, have little to gain. Of course, these borrowers have a lot to lose if rates move higher before they buy their next house, but refinancing their current mortgage will not help with that problem. Moving sooner though could be a benefit. 


If You Can Not Afford To Pay More Should Refinance Now


Homeowners, who anticipate that they could not afford the payment if their ARM rate increased up to the maximum over several years, should consider refinancing into a fixed rate mortgage right away. The savings from the low ARM rate may not justify the risk of getting caught by a rate increase that results in the loss of their home. 

Homeowners Unable or Unwilling to Monitor the Market Should Refinance Now


Homeowners who don't know how to monitor the market or don't want to invest the time required to learn how and when to do it, should refinance now.  


Otherwise, they are very likely to be caught by a rate increase.  


Borrowers, who just hope that the interest rate will below the next time their interest rate adjusts, fall into this category. The rate on most ARMs adjusts annually after the initial rate period ends, which means that the ARM rate can lag the market by up to 11 months. ARMs that adjust the rate monthly use rate indexes that are themselves lagged indicators as well.  


 Borrowers Who Monitor The Market Can Wait and See


These homeowners who are prepared to monitor the market and can take the risk of being caught with a higher interest rate can wait a bit. To minimize risk, you should still put in place a point to where you will not let the index tied to your loan to go above still even if you are watching the market otherwise it may hurt you in the long term,.


Borrowers who monitor the market should also be alert to refinance. You can't refinance in a day, or even a week, but you can minimize the time required by developing your refinance strategy beforehand. This means selecting one or several loan providers who you will contact as soon as you have decided to refinance.

For more information on home purchase loan or refinance programs for existing and potential home owners, please contact Bill Kamboukos of Strategic Mortgage at (480) 219-3682 or by emailing: info@strategicmtgaz.com or online at www.strategicmtgaz.com


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