For The First Time Since 2008, Mortgage ARMs To Adjust Higher

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In an unfortunate development for ARM-holding homeowners, adjustable rate mortgages are now adjusting higher.

4 Straight Months : Conforming ARMs Adjust Higher

First, a quick primer on how conforming, adjustable-rate mortgages work.

1. For some fixed period of time, the ARM mortgage rate remains constant
2. When the fixed period ends, the mortgage rate resets based on a preset formula
3. Every 12 months thereafter, the mortgage rate resets again based on the same formula

Expressed as a formula, the (New ARM Rate ) is equal to ( The Constant ) + ( The Variable ) where the constant is equal is 2.250 percent and the variable is equal the 12-Month LIBOR.

Historically, LIBOR has averaged near 5 percent.

Today -- by contrast -- LIBOR is sub-1 percent. This reading is an anomaly; the result of weak economies and a dearth of global private-sector financing. LIBOR can't stay low forever and, already, market pressures are pushing LIBOR higher.

Since bottoming in June 2011, LIBOR is up for 4 straight months.

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Keep Your ARM, or Trade It In For A Fixed?

If you have an adjusting ARM, you've been lucky -- it's been adjusting lower for the past few years.

Unfortunately, that's about to change. Beginning with your next ARM reset, adjusted ARM mortgage rates will rise. This is because LIBOR is higher today that it was a year ago.

So, as an ARM-holding homeowner, when your loan gets set to adjust, you have 3 choices :

1. Do nothing. Let your loan adjust higher and revisit the loan next year
2. Refinance your ARM to a new ARM at today's low rates
3. Refinance your ARM to a new fixed rate mortgage at today's low rates

Each option has its merits.

If you do nothing with your ARM, you'll get a new mortgage rate based on today's LIBOR, and that should put you near 3.250 percent. This is a very good mortgage and you'll have it for the next 12 months.

If you're nervous about what might happen to rates a year from now, you can refinance your mortgage to a new ARM, thereby locking in a new rate for the next 5 years, at least. You may incur closing costs in doing this, but the costs may be less than the higher payments that accompany "doing nothing" and floating with the market.  

Or, if you plan to keep your home longer-term -- either in which to live or hold as a landlord -- you can refinance into a 30-year fixed or 15-year fixed mortgage. The advantage here is that mortgage rates are very low right now -- likely lower than your initial ARM's teaser rate was in the first place.

Click here to get a mortgage rate quote.

Think About Today, But Plan For Tomorrow

If you have an ARM -- adjusting or not -- take a look at what's ahead for LIBOR. Your rate may be great today, but what about next year? Or the year after that?

LIBOR can change suddenly and, when it does, it will take your mortgage rate with it. Know your options and have a plan because as LIBOR rises, so should "regular" mortgage rates. When LIBOR spikes, it may be too late to refinance anyway.

Click here to get a mortgage rate quote.