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:
- There’s a “starter period” of several years in which the interest rate remains fixed.
- There’s an initial adjustment to rate after the starter period. This is called the “first adjustment”.
- 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, San Francisco homeowners have interesting options. Just don’t wait too long. LIBOR — and mortgage rates in general — are known to change quickly.
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