March 3rd, 2009
Refinancing Adjustable Rate Mortgages
With interest rates so low, and the unstable housing market, many people still in adjustable rate mortgages have been attempting to refinance into a 30 year fixed mortgage to lock in their rate. However, there is a considerable amount of people who are still in their ARM and wondering what to do with an upcoming interest rate adjustment. If you are in this position, you should take the time to investigate your mortgage and the options available to you.
The first thing to do is get out your loan papers and find out exactly what index your mortgage has been tied to and what is your add-on rate, also known as margin. Read closely, as most conventional loans are tied to the LIBOR index, but there are several different LIBOR rates as well as different indexes and you will need to know exactly which one applies to your situation. LIBOR stands for London Interbank Offered Rate, and is an index set by a group of London based banks and used as a base for U.S. based adjustable rate mortgages. So for example, with the LIBOR at 2.12, and your loan papers state your loan will adjust based on the 1 Year LIBOR with an margin of 4, your new interest rate will be 6.12%.
There are other specifics of your loan that will be in your mortgage documents. Some loans come with a 2% adjustment cap, such that your rate will not adjust more than 2% in any given adjustment. Some loans have a hard interest rate cap, but these are usually in the 10% range. Also you will need to see if there is a pre-payment penalty for refinancing. This is typical of subprime loans, but if you do have one, you will need to time your refinance to avoid the penalty and be able to refinance into a loan that makes sense for you. If you have a conventional ARM from a Fannie/Freddie lender you should have more favorable index rates, add-ons and less stiff prepayment penalties. If you have a sub-prime loan, it is more likely that your adjustment will be more severe.
There is a certain percentage of the population that has ARMs and is unable to refinance due to factors such as tighter income restrictions, declining house values, and damaged credit. If you are in this situation, you need to get out your loan documents and do some investigating. With rates still low, refinancing your mortgage might not be the best option for you, taking the adjustment may actually get you a lower rate than you would be eligible for in a refinance situation.
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In the UK many have been able to take advantage of tracker mortgages – the best mortgage deals some fixed below BoE rate so at present are paying 0% interest. The variable rate deals are several point higher so there is quite a variation on deal/rates here in the UK too.