Las Vegas! Trade Your ARM for a Fixed Rate.
Back in the “good old days” when an ARM loan was attractive with it’s low interest rates many homebuyers opted for these 2 & 3 year fixed rate loans. The majority of these home buyers were 1st time home buyers and did not fully understand the mortgage process let alone the downside of these exotic mortgages. Now keep in mind the mindset during this time period was that home prices would rise forever and you could just re-finance your ARM loan when it goes adjustable. This was the premise the brokers on Wall Street used to sell these mortgage backed securities to investors.
Well, as we all know home prices did not rise forever.
On the bright side interest rates are near historic lows thanks to the Fed lowering rates 150 basis points over the last 6 months.
What this means to you is if you do have an ARM loan with an interest rate that’s about to go adjustable don’t panic. I highly recommend refinancing into a 30 or 15 year fixed rate loan. These loans typically do not have a pre-payment penalty which means if rates do drop again you can refinance with no penalty. If rates go up and never drop to this level then you’re locked in for as long as you keep that loan. Either way you win!
By switching to a fixed rate loan, you will not only reduce your payment, you will also likely lock in an attractive rate for as long as you own your home.
In fact, while one year ARMs currently offer tempting introductory rates averaging 5.59%, most experts recommend avoiding them, because you could easily find yourself facing sharply higher payments in the near future, even if interest rates don’t rise. Why? Well, after the introductory rate expires, ARMs are typically pegged to the one year Treasury rate (recently 5.25%) plus 2.75 percentage points, with increases of as much as two points a year. Assuming interest rates don’t change, you would pay 7.59% in the second year (the full two point increase) and 8% in the third year.
There are certain cases, however, where an ARM makes sense. If you are fairly certain you’ll be moving within five years, you can save some money — and avoid rising payments — with a five year ARM, recently averaging 6.62%. Such loans offer a fixed rate for five years and adjust annually thereafter.
