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.

American homeowners are in love with fixed rate mortgages.

Homeowners Are Shortening Loan Terms, Abandoning ARMs

According to a Freddie Mac report of its own mortgage holdings, homeowners that refinance their mortgages are pouring into fixed rate products, regardless of whether their original mortgage was an ARM or a fixed-rate product.

Fixed rate mortgages accounted for 95% of all Freddie Mac-refinances in Q1 2010.

Some other interesting refinancre statistics:

• 25% of homeowners with a 30-year fixed refinanced into a shorter-term mortgage
• 58% of homeowners with a 20-year fixed refinanced into a shorter-term mortgage
• 0% of homeowners with a 15-year fixed refinanced into an ARM

And, speaking of ARMs, the most astounding fact from Freddie Mac is that just 8 percent of ARM-holders opted to refinance into a new ARM.

Considering how favorable ARM pricing has been since the start of the year, and how nearly every Freddie Mac ARM-holder's mortgage rate has adjusted lower since 2007, the tendency of ARM-holders to move into fixed rate loans says a lot about the American homeowner's psyche.

Homeowners are opting for payment predictability over payment savings.

Fear is beating frugality.

Everywhere You Look, Mortgage Money Is Cheap

Short-term uncertainty within global financial markets has created interesting choices for refinancing homeowners.

Normally, at this time of year, mortgage rates are just starting their summer pilgrimage towards 6.5 percent. This year, however, the combination of low inflation, a strengthening U.S. dollar, and nascent concerns of a global banking meltdown has pushed investors toward the mortgage-backed bond market.

ARMs are as low as they've ever been, the 15-year fixed rate money is near 4 percent and the 30-year fixed is back to all-time lows.

Everywhere you look, mortgage money is cheap.

Which Is Better -- ARM or Fixed? Here's How You Know.

So 92 percent of ARM-holders are moving into fixed-rate product.  I understand why, it just doesn't make much sense.  For two reasons, really.

First, as compared to 3 years, 5 years or 7 years ago when an ARM was first originated, the interest rate spread between ARMs and fixed product has gotten bigger.  In other words, the relative monetary benefit in choosing an ARM over a fixed rate mortgage is larger.

And, second, the logical reasons for taking an ARM over a fixed rate mortgage haven't changed.  Maybe you're moving in the next few years; or maybe you want the lowest possible payment; or maybe you're comfortable with adjusting payment risk.

If these reasons are why you picked an ARM a few years ago, it's all still relevant now.

Granted, some of the numbers are likely skewed by the Obama Refi Plan plus recent product limitations, but 92% of ARM-holders suddenly moving to a fixed?  Again, I understand it, it just strikes me as illogical.

Which Refinance Mortgage Is Right For You

Maybe the masses are right. Maybe the best thing to do is to refinance your home into a 15-year fixed rate mortgage and work on agressively paying down your principal.

Or, maybe, what's best for you -- as an individual -- is something else entirely.

You can't know the optimal path for your mortgage until you've asked some good questions and gotten some thoughtful answers.  Let's get started with that right now. and we'll look at your loan, and your options.

Mortgage rates are rock-bottom low. .

Each week, government-backed Freddie Mac publishes a weekly mortgage rate average compiled from 125 banks across the country.  Based on this week's survey results, home buyers in Cincinnati would be silly to not at least consider the 5-year ARM.

The 5-Year ARM Is A Steal-Of-A-Deal Right Now

As compared to the 30-year fixed, the 5-year ARM is an absolute steal.

Consider this comparison:

• In April 2009, the two products ran neck-and-neck with respect to interest rates
• In April 2010, the two products are split by 0.99 percent chasm

On a $300,000 home loan, that's a difference of $176 per month on a mortgage payment.

Some Folks Are A Perfect Fit For The 5-Year ARM

Now, adjustable-rate mortgages aren't suitable for everyone, but they can be a terrific fit given your individual circumstance.  For example, any of the following scenarios might warrant a 5-year ARM instead of a 30-year fixed:

1. You're buying a home and plan to sell it within the next 5 years
2. Your home is currently financed with a 30-year fixed mortgage and you have plans to sell your home within the next 5 years
3. You have an ARM now and want to get a "restart" on your starter rate

Before opting an ARM, speak with your loan officer about how adjustable-rate mortgages work, and what longer-term risks may exist.  The savings may be tempting, but there's more to consider than just the payment.

How To Apply For A 5-Year ARM At 3.875 Percent

To inquire about a 5-year ARM, call my office at 513-443-2020 or . We can review your situation and if the ARM isn't too risky for your goals, we'll move on to an official application and start working toward closing.

Most new mortgages are closing in 3 weeks.

(Post licensed and customized from the Bring the Blog blog-writing service)

ARM-holding homeowners tend to panic when their mortgage gets set to adjust; the feeling of "I better do something fast!".

If that's you right now -- if you have a conventional ARM getting set to adjust -- just hang loose, blood. Math is on your side. The smart move may be to let it adjust.

ARMs Are Adjusting Lower Right Now

Your mortgage rate could fall to as low as 3.125 percent.

It's all because of how ARMs work.

1. For some fixed period of time, the mortgage rate stays constant
2. When the fixed time period ends, the mortgage rate adjusts to a new rate based on a preset formula
3. Every 12 months thereafter, the mortgage rate re-adjusts against the same formula

The formula by which ARMs adjust is as follows:

And what are the "variable" and the "constant"? It depends on your mortgage, really, but if your home loan is making its first adjustment in 2010, the chances are very good that your ARM is structured as follows:

• The variable is the 12-month LIBOR -- currently near 0.850 percent
• The constant is 2.250 percent

This has been the default conventional ARM setup since mid-2005 and so long as the 12-month LIBOR remains low, so should your mortgage rate.

But therein lies the rub. LIBOR won't be low forever.

LIBOR Is Bound To Rise In 2010

Historically, LIBOR rates track very closely with the Fed Funds Rate and when the Fed starts to raise the Fed Funds Rate, LIBOR is going to rise, too. It's unclear when that will happen exactly, but LIBOR tends to rise ahead of actual Fed action.

Therefore, we can expect the 12-month LIBOR to rise well before the Fed raises the Fed Funds Rate. Maybe by a little and maybe by a lot. Either way, ARMs won't be adjusting lower much beyond Q1 2010.

Oh, and by the way, Fed Chairman Ben Bernanke has started laying the groundwork for such a move just last week. The writing is on the wall.

If you pass on the refinance this year, know that ARMs adjust annually so you'll face the same "Should I Refinance My ARM" question in 2011. Should LIBOR return to its historical 5 percent avergage by then, you can be sure your next adjustment will be up.

In other words, it may be wise to let your mortgage adjust in 2010, but foolish for 2011 and beyond.

Think Of The Present, Plan For The Future

So, if your ARM is adjusting and you want to know whether it's better to refinance or to just let the adjustment occur, and we can talk about making a plan.

LIBOR can change suddenly so what makes sense for you today might not make sense on the date of actual adjustment. Having a plan, therefore -- with contingencies in place -- is the best way to manage your ARM.

Call or email anytime. I'm looking forward to it.