Mountain Mortgage Guy: Adjustable-rate mortgages about to take a rate jump; here’s what to do (column)
The Mountain Mortgage Guy
If you have an adjustable-rate mortgage, then you might want to review the terms closely because the low-rate party for these loans is over. Many homeowners have grown complacent the last 10 years, enjoying adjustable rates that often dropped every year or were, at worst, in the 3 percent range.
Adjustable-rate loans are tied to a specified margin, such as the one-year Treasury bill yield or a LIBOR index (which is an index at which banks loan each other money to determine the change, which occurs at set anniversary dates outlined in your promissory note).
Typically, the index plus a markup of 2 percent to 3 percent determines the rate. There are also caps on how high and how fast your rate can adjust; typically your rate can’t go up more than 2 percent each year or cumulatively more than five to six points over where you started.
Since the New Year, pretty much every index used to peg rates for adjustable-rate mortgages has soared 1 percent to 2 percent. This means most existing mortgage loans are going to adjust to their maximum annual caps when their rollover, or anniversary, dates come up.
There are a myriad of reason for this increase, including the improving stock market and the growing reluctance of foreign investors to buy U.S. T-bills. Mortgage money comes from bonds sold by Fannie Mae and Freddie Mac, and the yields on those bonds are the cost of the money loaned out.
For some, this could mean an increase of several hundred dollars per month, depending on your loan term and amount. Let’s say you borrowed $500,000 four years ago at 3.5 percent. Your current principal and interest portion of your payment is $2,245 per month, and you owe $459,500. If your rate reset to 5 percent, then your payment would jump $255 per month to $2,500, and you could well face future increases and you have 26 years left on the note.
So the question begs, what is a smart move to manage this debt? Depending on your credit, property, loan amount and income, you might be able to refinance the loan into a 25-year fixed for a rate in the mid-4 percent range. This would lower your current rate, lock in the rate for the life of the loan and keep the payment close to where it just adjusted. You would also accelerate the pay-down because you are cutting a year off the term of your loan. If you need the lower payment, then refinancing into a new 30-year loan can save you a substantial amount every month.
Right now, new adjustable-rate loans are usually more expensive than a 30-year fixed rate. This phenomenon occurs occasionally in mortgage rates and in the past has been a bell-weather warning that long-term rates have not yet peaked. Many industry watchers are predicting 30-year fixed rates will hit the low 5 percent range by the end of the year.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.