ARM Rate Adjusting Down? Should You Refinance Anyway?

When adjustable-rate mortgages are on the verge of adjusting, a common concern among homeowners is that their mortgage rates will adjust higher.

Well, this year, because of the math of how ARM Rates adjust, homeowners in Denver and around the country are seeing that ARM rates can sometimes adjust lower, too.

ARM Rates are currently adjusting to as low as 3 percent.

As a quick review, here's the time line for most conforming adjustable-rate mortgages:

1. There's a "starter period" in which the interest rate remains fixed. This can range from 1-10 years.
2. There's an ARM rate change after the starter period. It's called the "first adjustment".
3. Subsequent, annual adjustments follow until the loan "ends". This is usually after Year 30.

ARM Rates at the adjustment point are calculated based on a formula.  Every ARM Mortgage has a fixed portion, called the margin, typically 2.25% or 2.5%.  The margin stays fixed for the life of the loan. 

The adjustable portion is tied to an index which adjusts according to the market.  Typical indexes are the LIBOR (London Interbank Offered Rate) and the US Treasury Index. 

When your ARM Rate adjusts, your rate is calculated as the margin + index = new ARM Rate until the next adjustment.

Indexes have been very low lately, and as a result, adjustable mortgage rates have been low, too.

In 2009, 5-year ARMs adjusted to 6 percent or higher. Today, ARM Rates are adjusting to 3.000%.

Based on the math, if you are planning to move in the next couple years, you may want to let your ARM adjust with the market year. Or, if you plan to keep your home long-term and have concerns about adjustments in 2011 and beyond, it may be a good time to open a new ARM.  The same forces that are driving down LIBOR and helping to keep mortgage rates low overall, too.

If you wait until ARM Rates go up before you lock in a new ARM or a fixed rate mortgage, it may be too late, as fixed rates will go up when ARM rates go up too. 

We can help you with a mortgage plan that fits your needs. With mortgage rates as low as they've been in history, most homeowners have options.  Just don't wait too long. LIBOR - and mortgage rates in general - are known to change quickly.