Adjustable Rate Mortgage

Did the Media tell you your rate was going to adjust into the 10's? Even the 9's....8's? We all know how the news media gets a hold of something and then wants to make sure they scare the bejesus out of you when you don't listen to them. Well, read on....this is about how your Adjustable Rate Mortgage is going to Adjust DOWN.


Do you have an adjustable rate mortgage? Did you obtain one through a conventional lender, bank or mortgage broker? Chances are your rate will drop when it goes to adjust.

The conventional lending world has many programs in the adjustable world and almost all come with a security blanket of some sort. "Caps", this is the limit your rate can adjust up or down from your existing mortgage rate. Typically this number is 2.00% for adjustments and then you will have a life time cap, this could be 4, 5 or even 6.00%. If your rate started at 5.5%, when it goes to adjust for the first time, it could not go lower than 3.5% or as high as 7.5% and over the life, it will not move more than the lifetime adjustment, we'll use 5 for the example and this would give you a rate of 10.5%. Chances are in the life of this loan, you will not reach this rate, ARM's have not been over 7.00% for 15 plus years.

Word of caution, I am speaking of Fannie Mae and Freddie Mac mortgages, these are the mortgages that are offered by mortgage and banking professionals. If you actually got a sub-prime mortgage, read your paperwork of how it will adjust.

Ready for the good news?!?!?!?!!!! IF your rate is going to adjust today or in the next few months, it will go DOWN. All banks and lenders use an Index and a Margin to figure out what your rate will be going forward and you signed paperwork on this. Typically the index can be a One Year T-Bill, Maybe the LIBOR or the COFI (click any of these for charts and definitions) these indexes run pretty close together and all are under 1.00% today. You will now add the Margin to this index. "Typically" the margin will be 2.75% and this could range on the lender or bank by a 1/4 percent. We are talking a few assumptions here but the norm will all lenders is 2.75. The language will say, Index plus margin rounded up to the nearest 1/8th. This will be your new rate for the next 12 months.

So, add the 1.00% and the 2.75 margin and what do you get? 3.75% is the average 1 year adjustable right now.

So before you run to the nearest bank or mortgage company to refinance out of your ARM, think of why you got it in the first place. I have one, it now adjusts every 6 months and has dropped the last 3 adjustment periods. My goal was to be in my house for about 5 plus years, but knowing full well I could be here for 8 years. A 5/1 ARM, no matter how the rate goes, will be cheaper than a 30 year fixed up to its 8th year. This is assuming it goes up every year and then the 8 year marks is the break even point.

If you thought you were selling in a few years, think this through. Your rate drops this year to somewhere in the high 3's even low 4 for the next 12 months. Worst case, in 12 months it goes up by 2.00%, now you are back to high 5's maybe low 6's. Your average monthly payment for 2 years will come out less than a 30 year fixed with the closing costs every time. Even if your rate goes up to 7.00%, it is still cheaper to keep this ARM into the 3rd year compared to the 30 year fixed. Remember, this is if you are still looking to sell your house in the coming 2 to 3 years.

You are probably reading this saying....this guy is nuts! He is actually talking us out of something that provides food for his family. This is true, this is how I make my living writing mortgages, but it is why I am still writing mortgages because of sound financial information like this. My career in mortgages is in consulting first and finding ways to help my clients. (so please do not tell my higher ups!)

Would you like more information on your adjustable rate mortgage? Even if I did not prepare your mortgage for you last time, send me an email or call me. A 5 minute phone call could save you thousands!

I look forward to hearing form you and your comments on these articles. The best way to get a hold of these days is via EMAIL.


Bill Nickerson
Vice President
Mortgage Network
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