Sure, if you’re Eliot Spitzer, you have plenty to panic about. But even if you are Eliot Spitzer AND your 4.75% LIBOR-based 3/1 ARM mortgage is about to adjust, you can take comfort in knowing that your rate won’t change much for the next year. In fact, your rate would be at 4.875%– only up .125%.
Like many of you, I too have a “hybrid ARM” (I love using hybrid in particular since it gives me that ever so popular green feeling), which means that I have a 30-year mortgage fixed for a period shorter than 30 years, and then converts to an adjustable-rate mortgage after the fixed period is over. What comprises the adjustable term of these mortgages includes both an index and a margin. The index is the variable component of the mortgage and the margin is the fixed component of the mortgage. Using the 3/1 example above, this mortgage is fixed for three years, then converts to the 1-year LIBOR index with a margin of 2.25%. The rate is then fixed at annual increments. The 1-year LIBOR is currently at 2.513%. Add the margin of 2.25, round up to the nearest .125% and voila!: 4.875% is the rate for the next year!
What if you have a Treasury-based 3/1 ARM based on a 2.75% margin that is adjusting? Then you’re even better off, as your new rate is 4.375%– down by .375%!
Now what if you had a 3/1 ARM and have been taking full advantage of interest-only payments? Then, if your rate is adjusting to roughly the same rate that you’ve been paying, your payment will increase by approximately 30% due to amortized payments over 27 years. If the increase in payments will be difficult to manage, then refinancing the mortgage is certainly an important consideration.
As always, consult with your preferred mortgage and financial advisor about what changes and programs are right for you, and please keep in mind that the above information may or may not apply to your particular situation.
650.543.8001 or etrailer@absolutemortgage.com
