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Are Adjustable-Rate Mortgages Todays Best Bargain?
For buyers and refinancing households throughout Georgia, adjustable-rate mortgages are a relative bargain as compared to fixed-ones.
According to Freddie Mac’s weekly survey of more than 125 banks nationwide, Blue Ridge and Blairsville mortgage applicants electing for a conventional ARM over a conventional fixed-rate mortgage will save 105 basis points on their next mortgage rate.
“Conventional” loans are loans backed by Fannie Mae or Freddie Mac.
Today’s average, conventional 30-year fixed rate mortgage rate is 3.91% plus points and closing costs. The average rate for a comparable 5-year ARM is 2.86%, plus points and closing costs.
In other words, for every $100,000 borrowed, a conventional 5-year adjustable-rate mortgage will save you $58.15 per month, or $698 per year.
That’s a 12 percent savings just for choosing an ARM. Read the rest of this entry »
Is There A Downside To Letting Your ARM Adjust Lower?
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 ARMs adjust, homeowners in Blairsville Georgia and around the country are seeing that mortgage rates on ARMs can sometimes adjust lower, too.
Adjusting conforming mortgages are adjusting to as low as 3 percent.
As a quick review, here’s the timeline for most conforming adjustable-rate mortgages:
- There’s a “starter period” in which the interest rate remains fixed. This can range from 1-10 years.
- There’s a rate change after the starter period. It’s called the “first adjustment”.
- Subsequent, annual adjustments follow until the loan “ends”. This is usually after Year 30.
The adjustments each year are based on a math formula that’s included in the contract with your lender. It’s surprisingly basic. Each year, your new, adjusted mortgage rate is equal to the sum of some constant — usually 2.25 percent — and some variable. The variable is most commonly equal to the 12-month LIBOR.
As a formula, the math looks like this:
(Adjusted Mortgage Rates) = (12-Month LIBOR) + (2.250 Percent)
LIBOR is an acronym standing for London Interbank Offered Rate. It’s an interest rate at which banks borrow money from each other — very similar to our Fed Funds Rate here in the United States. And also like our Fed Funds Rate, LIBOR has been low lately.
As a result, adjusting mortgage rates have been low, too.
In 2009, 5-year ARMs adjusted to 6 percent or higher. Today, ARMs are adjusting to 3.000%.
Based on the math, 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.
Consider talking to your loan officer and making a plan. 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.
Have You Looked At Adjustable Rate Mortgages Lately?
Each week, government-led Freddie Mac publishes a weekly mortgage rate survey based on data from 125 banks across the country. According to this week’s results, the relative rate of a 5-year ARM in the North Georgia Mountains…well in all of Georgia is extremely low versus its 30-year fixed-rate cousin.
Consider this comparison:
- In April 2009, the two products ran neck-and-neck with respect to rates
- In April 2010, the two products are split by 0.99 percent
On a $200,000 home loan, that’s a difference of $117 per month to a mortgage payment.
Adjustable-rate mortgages aren’t suitable for everyone, but they can be a terrific fit given your individual circumstance. For example, any one of the following scenarios could warrant a 5-year ARM:
- Buying a home with an intent to sell within 5 years
- Currently financed with a 30-year fixed mortgage with plans to sell within 5 years
- Interested in low payments and comfortable with longer-term interest rate and payment uncertainty
Additionally, homeowners with existing ARMs may want to refinance into a brand-new ARM, if only to extend the initial change date on the current note.
Before opting an ARM or a fixed, Contact Me, or give me a call at 706.994.8686 and I will put you in touch with a loan officer within my team about how adjustable-rate mortgages work, and what longer-term risks may exist. The savings may be tempting, but there’s more to consider than just the payment.
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Don't Rush To Refinance That ARM — It Could Adjust Even Lower
If your mortgage is set to adjust this year, the smart move may be to let it. Today’s conforming mortgages are adjusting lower than ever before — as low as 3 percent. It may not be what you expected when you signed for your ARM several years ago.
The reason why ARMs are adjusting lower is because of how they’re made.
When conforming adjustable-rate mortgages adjust, they adjust according to a pre-determined formula. The formula is the sum of a constant and a variable. The constant is usually 2.25 percent and the variable is a daily-changing interest rate called LIBOR.
The formula looks like this:
New Mortgage Rate = LIBOR + 2.250 percent
LIBOR is an acronym for London Interbank Offered Rate. It’s an interest rate at which banks borrow money from each other. In Fall 2008, when Lehman Brothers fell and sparked a global banking fear, LIBOR spiked as the risk of inter-bank borrowing jumped.
Since then, however, LIBOR is down.
Normalcy is returning to banking and the timing couldn’t be better for Blairsville homeowners with ARMs. 15 months ago, a homeowner’s ARM may have adjusted to 6 1/2 percent. Today, that same ARM falls to just above 3.
As a strategy play, it might make sense to let your ARM adjust. Or, because fixed rates are still near 5 percent, converting that ARM to a long-term fixed-rate product might make sense, too. The decision is a balance between how low do you want your payment, and how long might you live in your home.
The longer you stay, the more it might make sense to switch to fixed-rate, even though ARM rates are so low.
If you’ve got an adjusting ARM, talk to your loan officer about your choices. Once March ends and the Fed withdraws its mortgage market support, mortgage rates may rise and the fixed-rate option may be gone.
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