If you took out a 5, 7 or 10 year ARM anytime in the past 5-10 years, and you have an adjustment period coming up, you might be surprised?
Adjustable Rate Mortgages at Record Low Rates
The reason that the interest rates on adjustable rate mortgages are so low is because the index that the interest rate is tied to, is at an all time low.
Adjustable rate mortgages typically have a fixed rate period, which is identified with the first number of the ARM type – e.g. 5/1, 7/1, 10/1 ARM.
Here’s a great example from the website Mortgage-x that I want you to see
The 1 Year LIBOR is the most common index used for ARM loans in today’s market.
Looking at the above history of the LIBOR, you can see that the LIBOR index has been dropping for almost 5 full years now. Also notice that it hasn’t been a free fall either. May through July 2010 saw the LIBOR rise above 1.11% only to slowly drop back down to almost 5 year lows.
Adjustable rate mortgage rates adjust according to index + margin not to exceed rate caps.
An example of common rate caps is 5/2/5
- 5% maximum first adjustment
- 2 maximum subsequent rate adjustment
- 5% maximum cap on interest rate, the ceiling.
Assume a hypothetical situation where your current mortgage is an 5/1 adjustable taken out prior to 2007. Your index is LIBOR, your margin is 2.25%.
I have actually advised a personal client on this same scenario earlier this year.
Your interest rate in this scenario is probably not much lower than 5.75%. If your rate is better or worse, it’s easy to just add the difference in this scenario:
LIBOR at the time your rate adjusts, is at .77%
Your index is 2.25%
Your new interest rate? Around 3%.
Bonus if you have an interest only on that adjustable rate mortgage, most interest only periods are for 10 years, extending beyond the fixed rate and payment period.
If you have questions about using an adjustable rate mortgage, or if you already have an adjustable rate mortgage and you want to make sure you know what will happen when it adjusts, feel free to start a live chat, give us a call or leave a comment below. Hope this is helpful.