With LIBOR Low, Don't Rush To Refinance Your ARM

Is your mortgage scheduled to adjust this season? You may want to let it. This year's ARM-holding homeowners in Utah are finding out that an adjusting mortgage may be the simplest way to get access to today's low mortgage rates -- without paying the closing costs.

Currently, conventional adjustable-rate mortgages are adjusting to near 3.00 percent.

If your home is financed via an adjustable-rate mortgage, you're likely cognizant of your loan's life-cycle. At first, your ARM's initial mortgage rate is agreed upon between you and your lender, a rate that both parties agree will remain in place from anywhere from one to 10 years, with periods of five and seven years being most common.

Then, after the initial "teaser rate" expires, the mortgage's mortgage rate adjusts according to a pre-determined formula -- one that's also agreed upon at closing. The loan is then subject to an identical mortgage rate adjustment every 12 months thereafter until the loan is paid in full.

The most common conforming mortgage adjustment formula is to add 2.25 percent to the then-current 12-month LIBOR rate.

Today's 12-month LIBOR is 1.05% so, as a real-life example, an adjustable-rate mortgage that's leaving its teaser rate period this week would adjust to 3.30%.

If you're a homeowner who took a 7-year ARM in 2005, or a 5-year ARM in 2007, your newly-adjusted mortgage rate should be roughly 2 percent lower than your initial teaser rate. On a $250,000 mortgage, a 2 percent mortgage rate reduction yields $298 in monthly savings.

Therefore, if you have an adjustable-rate mortgage that's due to reset, don't rush to refinance it. For at least one more year, you can benefit from low mortgage rates and low payments.

As for next year's adjustment, however, that's anyone's guess.

Adjustable-Rate Mortgages Starting To Adjust Higher

For the first time in a year, homeowners with adjusting mortgages are facing rising mortgage rates. The interest rate by which many adjustable-rate mortgages adjust has climbed to its highest level since September 2010, and looks poised to reach higher.

This is because of the formula by which adjustable-rate mortgage adjust.

Each year, when due for a reset, an adjustable-rate mortgage's rate changes to the sum of fixed number known as a "margin", and a variable figure known as an "index". For conforming mortgages, the margin is typically set to 2.250 percent; the index is often equal to the 12-month LIBOR.

LIBOR stands for the London Interbank Offered Rate. It's a rate at which banks lend to each other overnight.

Expressed as a math formula, the adjusting ARM formula reads :

(New Mortgage Rate) = (2.250 percent) + (Current 1-Year LIBOR)

LIBOR has been rising lately, which explains why ARMs are adjusting higher as compared to earlier this year. There has been considerable stress on the financial sector and LIBOR reflects the uncertainty that bankers feel for the sector. 

LIBOR last spiked after the collapse of Lehman Brothers in 2008 amid global financial fears. Analysts expect LIBOR to rise into 2012 because of bubbling concerns in the Eurozone.

Despite LIBOR's rise, though, most adjusting, conforming ARMs are still resetting near 3 percent. For this reason, homeowners with ARMs in Utah may want to consider letting their respective loans adjust with the market.

This is because an adjusting mortgage rate near 3 percent may be better than what's available with a "fresh loan" -- even as 5-year ARMs rates make new all-time lows. Unlike a straight refinance to lower rates, an adjusting loan requires no closing costs, requires no appraisal, and requires no verifications.

So, if you have an adjustable-rate mortgage that's set to reset this season, don't rush to refinance it. Talk to your lender and uncover your options. Your best course of action may be to stay the course.

Conforming ARMs From 2004-2006 Are Adjusting To 3 Percent

When a mortgage applicants chooses an adjustable-rate mortgage over a fixed-rate one, he accepts a risk that -- at some point in the future -- the mortgage's interest rate will rise. Lately, though, that hasn't been the outcome.

Since mid-2010, conforming mortgages have adjusted below their initial "teaser" rate consistently, giving homeowners in Utah and nationwide reason to ride their respective adjustable-rate mortgages out.

For example, this month, conforming 7-year and 5-year ARMs are adjusting near 3.011 percent based on the most common loan terms of 2004-2006. It's because of how adjustable-rate mortgages are structured.

Adjustable-rate mortgages follow a defined lifecycle. First, the ARM's mortgage rate is pegged; held fixed for a set number of years. This period ranges from one year to 10 years; periods of five and seven years are most common.

When the initial fixed-rate period ends, the mortgage rate then adjusts based on a pre-set formula. The formula is established by contract in the mortgage closing paperwork, and is commonly defined as:

(Adjusted Mortgage Rate) = (2.250 percent) + (Current 1-Year LIBOR)

Next, every 12 months, based on the same formula as above, the ARM adjusts again until 30 years have passed and the loan is paid is full.

It's important to recognize that in the above equation, LIBOR is a variable so as LIBOR goes, so goes your adjusted mortgage rate. And because LIBOR is ultra-low right now, adjusted mortgage rates are ultra-low, too. LIBOR is expected to stay this way until the global economy has recovered more fully. Analysts predict a higher LIBOR by mid-2012.

So, if you have an adjustable-rate mortgage that's due to reset this season, don't rush to refinance. For at least one more year, you can benefit from low rates and low payments.  As for the next adjustment, though, that's anyone's guess.

Adjustable Rate Mortgages Adjusting To 3.000 Percent Right Now

If your ARM is due to adjust this spring, your best move may be to allow it. Don't rush to refinance -- your rate may be adjusting lower.

It's because of how adjusted mortgage rates are calculated.

First, let's look at the lifecycle of a conventional, adjustable rate mortgage:

1. There's a "starter period" of several years in which the interest rate remains fixed.
2. There's an initial adjustment to rate after the starter period. This is called the "first adjustment".
3. There's a subsequent adjustment until the loan's term expires. The adjustment is usually annual.

The starter period will vary from 1 to 10 years, but once that timeframe ends, and the first adjustment occurs, conventional ARMs enter a lifecycle phase that is common among all ARMs -- regular rate adjustments based on some pre-set formula until the loan is paid in full, and retired.

For conventional ARMs adjusting in 2011, that formula is most commonly defined as:

(12-Month LIBOR) + (2.250 Percent) = (Adjusted Mortgage Rate)

LIBOR is an acronym for London Interbank Offered Rate. It's the rate at which banks borrow money from each other. It's also the variable portion of the adjustable mortgage rate equation. The corresponding constant is typically 2.25%.

Since March 2010, LIBOR has been low and, as a result, adjusting mortgage rates have been low, too.

In 2009, 5-year ARMs adjusted to 6 percent or higher. Today, they're adjusting near 3.000 percent.

That's a big shift. 

Therefore, strictly based on mathematics, letting your ARM adjust this year could be smarter than refinancing it. You may get yourself a lower rate.

Either way, talk to your loan officer. With mortgage rates still near historical lows, Salt Lake City homeowners have interesting options. Just don't wait too long. LIBOR -- and mortgage rates in general -- are known to change quickly.