There is a lot of media and mortgage hype about getting out of your dangerous adjustable rate mortgages. Mortgage companies stand to benefit every time you refinance and the media thrives on drama. I’m contacted often by consumers who are horrified of their adjustable rate mortgage–depending on your terms (margin and index) your ARM may be fine!
One of my clients, Scott, who I helped with a refinance almost five years ago just contacted me curious about refinancing out of his current ARM into a fixed rate. He heard on the news that mortgage rates are low right now.
Scott obtained a 5/1 ARM with a start rate of 3.75%. His fixed period is over around July of this year and his caps are 5/2/5 with a 2.25 margin and the index is the 12 Month LIBOR. His current balance is about $121,500.
Scott expressed an interest in doing another 5/1 ARM. He’s not sure how long he will retain this property. Currently, I can offer the following (both refi’s have closing costs of $1900):
- 5.25% at 1 point (APR 6.965%) with principal and interest of $717. Should Scott decide to pay the point, it will take 3 years to break even on the cost.
- 5.625% at 0 points (APR 7.018%) with principal and interest of $748.
He can also elect to not refinance his ARM and wait to see what the payment will adjust to in July. He still has a few months to wait this this out, however, if his ARM were adjusting today, here is what his payment would look like:
1 Year LIBOR = 2.85% plus the margin of 2.25% = 5.10%. Rounded to the nearest rate, the new rate for the next 12 months would be 5.125%. Taking his current balance of $121,500 at 5.125% for 25 years (the remaining term) would create a principal payment of $719.15. This is without refinancing or additional cost (out of pocket or equity) to Scott.
If Scott is comfortable allowing his ARM to adjust and making his payment of $719.15 for the next 12 months, he should not refinance. Some home owners are "up in arms" over their adjustable rate mortgages and if it’s something that’s going to cause to lose sleep, you may want to check out what your options are for refinancing out of the ARM. Regardless of what you do, it’s crucial that you understand your mortgage, the terms and how it operates and what your options are.
If you need help, ask your Mortgage Professional to review your Note with you. If you need a new Mortgage Professional because they’ve either left the business or have forgotten about you, I’m happy to adopt your Washington State mortgage.