Vail Daily column: Will ARM cost you a leg?
As I’ve often said, an ARM can cost you a leg. Heck, it might cost you both legs. In this case, an ARM is an adjustable rate mortgage, and there are more and more of them sitting out there like nice cute little ticking time bombs that homeowners have forgotten about.
The reasons these mortgages are so cute is that right now they are providing some incredible rates for borrowers. I know many people with ARMs that are carrying a rate of 3-4 percent right now. But the basic premise of an ARM is the interest rate is triggered to adjust to economic conditions. And for the last seven years, economic conditions have been pretty sad and that has kept interest rates low via market manipulation by the Federal Reserve Bank. This situation has benefited millions of homeowners, and certainly helped homeowners who may have lost their equity have a reason to hang on. We all have to live someplace, so if your mortgage payment is less than or close to what you might pay for rent, then you might as well hang onto your upside down property and wait for the tide to come in.
For those that have ARMs, they have actually been doubly blessed because their mortgage rates have been at rock bottom. This has triggered a higher part of their mortgage payment to go to principal as well, knocking more money from the amount owed than many expected.
But, this has also created a false euphoria and at some point these homeowners will go to the mailbox and open their mortgage statement to get a very rude surprise that their rate and payments have jumped significantly. While the first reaction might be that the homeowner will run and refinance to a lower rate, they may find that ship has sailed and rates across the board will have gone up. ARM rates are designed to move in relation to current mortgage rates, so if your ARM rate goes up, then it means that other rates will follow, and in many cases, already did go up. Keep in mind your ARM probably adjusts once a year, so if rates start to go up shortly after your loan adjusts, then there will be a year lag before yours goes up, which is great in that you skated for a year, but any shot at locking in a refi at a good rate may be long gone before you realize what is happening.
There are however viable options for keeping that low rate (or at least a fairly low rate) locked in for some time. Depending on your situation, you might be able to get a fixed rate loan which for a loan amount of under $417,000 would be in the low 4 percent range. If you went for a 15-year term, then it would be in the low to mid 3 percent range.
Five- to Seven-Year Programs
But if you need a 30-year term to keep your monthly payment down, a great option right now is a new loan that is fixed for five to seven years (and will adjust annually thereafter) and those rates are in the 3 percent range. To score these programs you do have to have equity in your property and otherwise qualify credit and income wise. The five-to-seven-year programs are also great if you don’t plan to be in the house for the long haul.
Refinancing is not that complicated, except for analyzing all the options to be sure you are in the right place you want to be. For that you need to sit down with an expert, evaluate what the terms of your adjustable rate note really mean and look carefully at all the options. This is not something you can master on your own, and you will benefit from expert, objective advice.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.