When adjustable-rate mortgages are on the verge of adjusting, a common concern among California homeowners is that their mortgage rates will adjust higher.
Well, this year, because of the math of how ARMs adjust, homeowners in Riverside 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 index. 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 only issue with another ARM is that the government recently made them more difficult to qualify for. But you may still be able to lock in a 30 year foxed in the mid 4% range. The same forces that are driving down LIBOR and helping to keep mortgage rates low overall, too.
If you don’t have a Loan Officer to help you figure out your best option, consider calling me and I will do a side by side comparative analysis of all your options…..even if your home value is upside down. Brad Yzermans (951) 215-6119 or brad@homeloanartist.com
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