In the last several years, many homeowners looking to take advantage of a lower monthly mortgage payments took out adjustable-rate mortgages to purchase or refinance their homes. As both mortgage rates and short-term interest rates, remain low it boils down to one financial decision at the end of the day;
Keep or refinance your adjustable-rate mortgage:
Factors at work…
1. Short-term interest rates remain low– your rate is usually pegged to the 12 month Libor Index. The value is presently at .59%, your margin is most likely somewhere around 2 to 3%, call it 2.5%, (index + margin equals your interest rate). Big The LIBOR (London Interbank Offered Rate) index trails the Federal Funds Rate, which is rate the Fed uses to control the economy. Fact: the Federal Reserve has not tightened interest rate since 2004 when the economy was experiencing vibrant job growth, unless the economy rebounds overnight, plan on enjoying a low mortgage rate.
2. Fixed-rate products-such as the 30 year fixed rate mortgage, make an alternative to a fixed debt structure, moving away from the decisions of the Federal Reserve Bank.
3. Home equity-you’ll need at least 3% equity in your primary residence to refinance your adjustable rate mortgage.
4. Liquidity position-Is paying down the principal balance more beneficial for refinancing? Give it consideration…
The return on equity by means of payment reduction will far likely outweigh your money market returns of a .5% for example. Here is a cash on cash illustration, if it takes $50,000, to free up $400 per month, you’ll receive a 10.42% return on your money versus the .5% bank premium.
Adjustable-rate mortgage versus fixed rate, decide your mortgage payment
Know Our Market:
Wall street is heavily influencing the origination and securitization of “fixed rate mortgages”. In other words, bond market investors are literally buying a fixed rate mortgage market, steerubg the flow of money into longer-term principal and interest types mortgages securities.
In typical mortgage rate pricing pattern, you will typically see a spread of the least 1.5% in a rate comparing a 30 year fixed rate mortgage to an adjustable such as a 5/1 arm.
Here’s the latest math:
“Loan amount $200,000
Loan-to-value 60%
Credit score 800
Primary residence single-family home
No cash out refinance”
A lender’s perfect credit profile right?
The 5/1 arm prices out at a rate 3.25% assuming no discount points. Compare that to a 30 year fixed, same loan parameters, the interest rate is 3.375% no points
An .125% in rate will mean more fixed rate loan applications
How this affects people deciding to stay put or refinance their adjustable-rate mortgages
Homeowners who have an adjustable-rate mortgages deal with annual adjustments to their interest rate and subsequent payment throughout the duration of the remainder of their loans.
If that the loan was..
3/1 ARM-mortgage payment will reset every year for the remaining 27 years of the original 30 year term.
5/1 ARM-mortgage payment will reset every year for the remaining 25 years of the original 30 year term.
7/1 ARM-mortgage payment will reset every year for the remaining 23 years of the original 30 year term
10/1 ARM- mortgage payment will reset every year for the remaining 20 years of the original 30 year term.
Or……
Take pointers from bond market investors, many of them are controlling the funds in your financial plans, 401(k)s and retirement accounts. Yep it’s true, your investments are likely filled with Fannie Mae Mortgage Bonds. These investors are promoting fixed rate loans for a reason. In many cases, refinancing to a fixed rate loan can be a wise decision. Have an adjustable-rate mortgage that you’d like to refinance? Contact scott@sonomacountymortgages.com or get a complementary no obligation mortgage rate quote for your situation.
