Interest rates are at a four-year low.   As a result, my phone has been blowing up for the past week with people looking to refinance.

A nice woman named Phyllis called me this week to refinance.  She has a 5 year adjustable rate mortgage at 6.500% that is scheduled to reset in the next month and she is literally freaking out. 

"Aaron, when my rate goes up next month, I won't be able to afford this home any longer."

I did the research on her home.   Her loan amount is $275,000 and the house is worth about $260,000.     Obviously, she can't refinance.   

In case you don't know, here is how adjustable rate mortgages adjust.  You add the index you are tied to, likely the LIBOR, on the date of your reset, and the margin you agreed to when your loan closed, which should be somewhere between 2.000 and 3.000, and that's your new rate.    Rates can adjust up or down.

It may stay that way for six months or a year, depending on your Note, and then it will do it again. 

My first reaction, as it is today, was note modification through her bank.    However, first I asked her if she knew what index her loan was tied to or what her margin was.  She didn't know.  I had her fax me her Note.

It turns out she is on the LIBOR Index and her margin is 2.250%.    Based on the LIBOR today of around 3.25 and her margin of 2.25, her rate will actually likely DECLINE by a full point.   

Her rate is going to adjust DOWN to 5.500% or so from 6.500%.  Phyllis is going to save nearly $220 per month for at least the next year.

She was in happy tears when I called to tell her. 

Before you "freak out" about your ARM adjusting, pull out your Note or call your lender to find what index you are on and what your margin is and then calculate the new rate.  

To see where your index is today, you can "Google" any of the indexes and get today's index rate.  Add this to your margin and there you go.

Based on the way rates and indexes have been coming down of late, you may be very surprised where your loan really stands today.