With LIBOR Rising, It’s Time To Ditch Your About-To-Adjust ARM For A Brand-New Mortgage

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For the better part of the last 9 months, homeowners with adjusting adjustable rate mortgages have watched their mortgage rates fall.

As short-term solutions go, it's been far smarter to let the mortgage adjust than to refinance into a new ARM or fixed rate loan. Until now, that is. It's time to convert that soon-to-adjust ARM into something new.

This is the opposite advice we gave in February when LIBOR was ultra-low.

The Math For Adjusting Mortgage Rates Is Worsening

Earlier this year, 3-year, 5-year and 7-year ARMs adjusted to as low as 2.875 percent. It was a godsend to households worried their ARMs would actually go up in rate.  2.875 percent is pretty excellent.

Today, though, that's not happening.

Households with June-adjusting mortgages would get a 3.625 percent rate based on today's market. And if the issues in broader Eurozone don't settle themselves down quickly, later this year, households with ARMs could see them adjust to 5.000 percent or higher.

It's all because of how adjustable rate mortgages work.

1. For some fixed period of time, the initial mortgage rate stays constant
2. When the fixed period ends, the rate is recalculated based on a formula
3. Every 12 months thereafter, the rate recalculates again against the same formula

The formula by which ARMs recalculate is as follows:

The "variable" and the "constant" will vary from ARM to ARM, but if you've got a conforming home loan originated after 2002, the chances are very high that your variable is the 12-month LIBOR and your constant is 2.250 percent.

In other words, to calculate your adjusting mortgage rate, just add 2.25% to LIBOR and voila -- that's your new mortgage rate.

LIBOR Is Rising, Rising, Rising

LIBOR stands for London Interbank Offered Rate.  It's the interest rate at which banks lend money to each other and LIBOR tends to rise and fall with the stability of the global banking system.  It spiked in 2008 after Lehman Brothers failed and it's showing a similar pattern today.

And as debt crisis spreads from Greece to Spain to the rest of Europe, the risk of lending amongst the banks gets larger.

Hence, LIBOR rises, too.

The 12-month LIBOR bottomed out in February 2010.  It's up 68 percent since. That's bad news for homeowners whose mortgages are adjusting in June and later this year.

A New Mortgage Is Now As Cheap As An Adjusting One

The same dynamic that is causing adjusting mortgage rates to adjust higher is also causing new adjustable rate mortgage rates to drop. Homeowners can opt for a new ARM at the same rate or better than to what rate their existing loan would adjust.

In bullet points, it looks like this:

1. Let your mortgage rate adjust to 3.625% and adjust every 12 months thereafter
2. Take a new mortgage at 3.625% and get the rate locked for 3 years or longer

Taking a new ARM looks like a complete no-brainer right now, so long as you can keep your closing costs to a minimum.  You don't want to wash out your payment savings with huge costs you'll never recoup.

What To Do About Your ARM

If your ARM is adjusting and you want to know if it's better to refinance or let the adjustment happen,and we can have a conversation about what's best for you.

With "new" mortgage rates at their lowest levels of forever all-time, this is truly the best time to ditch your adjusting ARM for a new one, or a fixed rate loan.

Call or email me anytime. We'll figure out your plan.