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If your adjustable-rate mortgage is in its adjustment phase, refinance it. For the first time since last decade, new ARM teaser rates are lower than the rates on adjusting ones.
New ARMs Fall Below 3 Percent
Fixed-rate mortgages are très popular these days, but for homeowners with plans to move or sell, or in want of the lowest mortgage payments possible, adjustable-rate mortgages are a very attractive option.
Mortgage rates on all types of ARMs -- conforming, jumbo-conforming, FHA, and jumbo -- are super-cheap and readily available.
ARM mortgage rates are so low, in fact, that it's now cheaper to refinance into a new ARM than it is to let your current ARM adjust to the current market conditions.
This hasn't happened in years and it's creating opportunity for astute homeowners to save money via refinance.
How Adjustable-Rate Mortgages Work
First, let's review how conforming, adjustable-rate mortgages work.
- For some finite time period, the ARM mortgage rate stays constant (e.g. 5 years)
- When the finite time period ends, the mortgage rate changes based on a preset formula
- Every 12 months thereafter, the mortgage rate changes again, based on the same formula
The formula by which a conforming, adjustable-rate mortgage adjusts is straight-forward. The new rate is equal to ( Constant ) + ( Variable ) where Constant = 2.250% and Variable = The current rate of the 12-month LIBOR.
LIBOR Rises As U.S. Mortgage Rates Fall
LIBOR stands for London Interbank Offered Rate. It's the interest rate at which banks lend money to each other.
Given the large-scale sovereign debt concerns within Europoe, then, it's no surprise that LIBOR has been rising since last Summer. As the debt crisis spreads from Greece to Spain to Italy and to the rest of Europe, and as credit downgrades affect nearly all Eurozone members, the risks of inter-bank lending increase.
This is why LIBOR is rising.
Meanwhile, as investors watch Europe wrestle with debt issues going on 2 years now, they continue to seek safety of capital and the U.S. mortgage market offers that. With higher yields than a comparable-term Treasury and the implicit backing of the U.S. government, mortgage-backed bonds have been in high demand.
It's why mortgage rates are so low. As investor clamor for MBS, bond prices rise and bond yields fall. This means lower mortgage rates for everyone from San Diego, California to Reston, Virginia and everywhere in between.
LIBOR touched its all-time low 7 months ago. It's been rising since. And, while it's been rising, standard, conforming ARM mortgage rates have dropped. The two crossed paths in August 2011 and the gap continues to widen today.
It's now a half-percent cheaper to get a new ARM than to let your current ARM adjust.
Get A New ARM Rate Quote
If your current loan is an ARM -- adjusting or not -- take a look at your future. As LIBOR rises, the benefits of refinancing increase. It's easier to let your loan adjust, I know, but this is an instance where "doing nothing" can cost you thousands.
Today's adjustable-rate mortgage rates are extremely low. Know your options.
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