If your mortgage is set to adjust this year, the smart move may be to let it. Today’s conforming mortgages are adjusting lower than ever before — as low as 3 percent. It may not be what you expected when you signed for your ARM several years ago.
The reason why ARMs are adjusting lower is because of how they’re made.
When conforming adjustable-rate mortgages adjust, they adjust according to a pre-determined formula. The formula is the sum of a constant and a variable. The constant is usually 2.25 percent and the variable is a daily-changing interest rate called LIBOR.
The formula looks like this:
New Mortgage Rate = LIBOR + 2.250 percent
LIBOR is an acronym for London Interbank Offered Rate. It’s an interest rate at which banks borrow money from each other. In Fall 2008, when Lehman Brothers fell and sparked a global banking fear, LIBOR spiked as the risk of inter-bank borrowing jumped.
Since then, however, LIBOR is down.
Normalcy is returning to banking and the timing couldn’t be better for North Little Rock homeowners with ARMs. 15 months ago, a homeowner’s ARM may have adjusted to 6 1/2 percent. Today, that same ARM falls to just above 3.
As a strategy play, it might make sense to let your ARM adjust. Or, because fixed rates are still near 5 percent, converting that ARM to a long-term fixed-rate product might make sense, too. The decision is a balance between how low do you want your payment, and how long might you live in your home.
The longer you stay, the more it might make sense to switch to fixed-rate, even though ARM rates are so low.
If you’ve got an adjusting ARM, talk to your loan officer about your choices. Once March ends and the Fed withdraws its mortgage market support, mortgage rates may rise and the fixed-rate option may be gone.
David Lukas is an active loan officer and can be reached at David@DavidLukas.com or by calling 501-952-3090. Also be sure to visit www.DavidLukas.com
For most consumers, the most important part of finding the right mortgage is convincing themselves they have found the “lowest” interest rate. This is understandable, as the interest rate is certainly is an important component of the mortgage. Obviously one of your goals should be to achieve a great rate; however, how does one go about accomplishi
ng this? There are a few things that someone refinancing or purchasing a home needs to understand.
First, one needs to know that ALL mortgage rates that have low-fixed rates (FHA, VA, Rural Development and Conventional) are driven by the daily trading of mortgage-backed securities. These mortgage bonds trade on the Chicago Board of Trade. This is very similar to how stocks trade on the NASDAQ and DOW. Just like stock prices, mortgage rates change weekly, daily and even hourly; therefore, obtaining the lowest rate can be somewhat elusive. (If you would like keep up with the mortgage market, click on the weekly mortgage market update on this site, or go to DavidLukas.com)
Suppose you lock in your rate with your lender that you decide to go with. Three weeks into the process, you are getting ready to close your loan. A day before your loan closes, the bond-market rallies and mortgage rates drop a quarter of a percent. Now all of a sudden have you really gotten the lowest interest rate? Are you going to stop the entire process, transfer your appraisal, delay your closing and switch lenders only for the same scenario to possibly happen again? What if two days after your loan closes, rates drop even further? Have you achieved the lowest rate available? The answer of course is no.
The reality is that mortgage rates are affected by many factors within the economy. If myself or anyone else for that matter knew the exact hour and day rates would be at their lowest, we would all be rich. So as you can see, achieving the “lowest” rate can be problematic; therefore, your best shot is to ask around and find someone who understands the dynamics of the mortgage market and can help you decide when to strategically lock in your interest rate. Make sure you are working with a mortgage professional that has access to live, real time, mortgage bond quotes. If the lender you are speaking with cannot explain how mortgage bonds and interest rates are moving in real time and warn you of costly intra-day price movements, you are most likely not working with a professional whom you want to entrust financing one of your largest assets, Your Home.
I have seen people obsess over getting the “Lowest Rate”, only to miss the boat. Even if you were able to attain the “Lowest Rate”, this is only one piece of the puzzle. There are so many factors that you want to take into consideration other than just your interest rate. A great rate on the wrong mortgage strategy, can literally cost you tens of thousands of dollars over the life of your loan. It is very important that you ask around and find a loan professional that takes into consideration your overall long and short term financial goals. Your mortgage is such a large component of your financial life.
Don’t entrust the process to someone who has diminished such an important transaction in your life into nothing but rates and fees. Unfortunately most loan officers have comoditized the industry and have become nothing more than order takers. Yes the interest rate and the fees you pay are important, but overlooking all other aspects of what you are looking to accomplish can cost you dearly. If you utilize your mortgage properly, it can be an intreral in helping you reach your short and long term financial goals.
I encourage you to visit the CMPS Institute. This is a great place to start your search for a loan professional who approaches your mortgage from a financial planning perspective.
David Lukas is an active loan officer and can be reached at David@DavidLukas.com or by calling 501-952-3090. Also be sure to visit www.DavidLukas.com
