Friday Q&A: Refinance or Get a New ARM?
Q: "I’m on the last year of an adjustable rate mortgage (5/1) before the rate changes and my monthly mortgage payment was supposed to go up. That’s the way ARM’s work, right? I recently got a letter from my bank saying that my ARM rate adjustment was a minor one – and that my payment would hardly budge at all, at least for the next year. We’re obviously delighted we dodged a bullet, but should we refinance now to a fixed rate, or roll the dice on a new ARM rate next October?" - C. B., Austin, Texas
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A: You’re right about the ARM rate; it’s really one of the most interesting phenomena on the real estate landscape this year.
Conventional wisdom – and recent history – suggests that when an adjustable rate mortgage adjusts, it invariably goes up, leading to significantly higher monthly mortgage payments.
But so far this year, ARM rates have increasingly adjusted down, as interest rates remain low. Right now the ARM rate for one, three, and five-year models are as follows, according to the BankingMyWay Mortgage Rate tracker.
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ARM Category Rate %
1-Year 3.265%
3-Year 3.560%
5-Year 3.464%
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Compare these rates to the 30-year fixed rate, which stands at 4.412%, and you’ll see what we’re getting at here.
With most ARM loans, you face an “adjustment” on your loan rate every year. According to the math, adjustable rate mortgages are tied to an interest rate benchmark, like the London Interbank Offered Rate (LIBOR). The one-year LIBOR rate currently stands at 0.77%.
Many (but not all) ARM terms are calculated tying a fixed rate sum to a variable rate like LIBOR. For example, a mortgage lender could say your adjusted ARM rate is calculated by the average 12-month LIBOR rate plus 2.00%.
