If you have an Adjustable Rate Mortgage, or ARM, you could be in for a rude awakening the next time it resets. ARM’s are currently resetting at rates near 5%, the highest rate since 2008. This could lead to a significant raise in your mortgage payments. With lower mortgage rates, it’s time to cut off that ARM.
If you’ve been rolling your ARM over year to year, you may not have been watching for a big jump in rate. People who have been using ARMs have been saving a good deal of money by continuing them, but the end of that gravy train is fast approaching. So far, you’ve benefitted from low rates, but with the market shifting, it is past time to look into a fixed-rate mortgage, as rates are expected to hew higher going forward into 2019 and 2020.
For a little background, an ARM, or adjustable rate mortgage, works as a market-based mortgage, where the interest rate fluctuates with market conditions and can change over time.
As an ARM’s interest rates changes can wreak havoc on a budget, changing the payment you have to make on your mortgage and blowing holes in your budget. ARMs carry that risk that just is not there in a fixed-rate loan.
Usually with an ARM, you get three stages to the loan:
- For either 5 or 7 years, the mortgage rate stays the same.
- When that period ends, your rate will correct using a formula set in your agreement.
- Every year after that, your rate resets to the current market rate, using the same formula from your mortgage agreement.
The formula to determine your rate is pretty easy. The new rate you will be charged for an ARM is the sum of a variable market rate, usually the 12-month LIBOR – and a constant determined in your agreement, that typically falls around 2.25 percent.
The math is then academic – add your constant to LIBOR and you get your rate. So if LIBOR was 3%, your rate would be (3) + (2.25), or 5.25%.
So, if you’re looking at today’s rates, where you can get a fixed-rate mortgage in the 3’s, why would anyone take that roller-coaster offer of an ARM? If you have a current ARM that is close to rolling over it could be time to look at refinancing your mortgage to a fixed-rate mortgage.
There are three options for adjusting an ARM: Do nothing and let the new rate take effect. Refinance your ARM to a new ARM, or refinance your ARM to a new fixed rate mortgage. Let’s talk about how that last one will work.
When you refinance your loan from an ARM to a fixed-rate mortgage, you remove the uncertainty of changing rates. You know that for the length of your mortgage, you will pay the same rate and price. If you are planning on staying in this home, a fixed-rate mortgage is a great fit.
Because LIBOR rates and most other markers for an ARM increase as the economy does better, an improving economy is the enemy of an ARM. While a fixed-rate mortgage keeps you at the same rate during any economy, making it the safer choice for a stable homeowner that wants to remain in the home.
Call The Home Loan Expert Team in St. Louis at (314) 781-9700, Chicago at (773) 770-4727, Indianapolis at (317) 550-1515, Nashville at (615) 810-8555 or Birmingham, AL at (205)721-7656. You can always apply online at hero.loan for your VA Loan, and www.thehomeloanexpert.com for your other mortgage needs, and we’re also open on Saturdays and will come to you to help close your loan. We work hard to make it easy on you. Nobody gets lower rates on better loans than The Home Loan Expert, Ryan Kelley, why go anywhere else?