Is your ARM going up?

If your Adjustable Rate Mortgage has recently gone up, you are not alone!
Over $600 Billion in Mortgages are adjusting in 2007!
In 2004, the Federal Reserve made it clear that short-term interest rates would be increased at a “measured pace” because of a fluctuating US Dollar, unstable oil prices and an evaluation of other economic indicators. In an effort to curb inflation, the Federal Reserve has kept its word and continued to raise rates, including an incredible streak of 17 consecutive hike announcements! The result of these increases has caused millions of homeowners with adjustable rate mortgages to feel the sting of increases in their annual adjustments.

Consumers with revolving debt accounts tied to the Prime Rate have already felt the impact. Prime Rate always rides 3% above the current Fed Funds Rate.

An increase in the Fed Funds Rate does have a direct impact on financial markets as a whole. Mortgage rates are affected rather indirectly, they go up or down based on the prevailing perception investors have of current economic statistics and their reaction to the Federal Reserve’s after-meeting statements.

In general, when economic data indicates we have a slow-down occurring in our economy, investors tend to sell off stocks and reallocate that money to the safe haven of bonds and mortgage-backed securities. The purchase of mortgage-backed securities drives interest rates down. When economic data indicates growth in the economy, the stock market typically rallies and mortgage-backed securities sell off to fuel that stock market rally. This drives mortgage interest rates up.

Our current market reflects the reaction of investors having read between the lines on comments made by the Fed, and will continue to have an affect on homeowners with ARM Loans tied to indexes that are based on short-term interest rates. This includes the 11th District Cost of Funds (COFI), 12-Month Treasury Average (MTA), London Inter Bank Offering Rates (LIBOR) and others.

This does not mean that everyone with an adjustable mortgage is in immediate danger. Some indexes are more volatile than others. COFI moves much slower than other adjustable rate indexes. LIBOR fluctuates with more volatility. When an ARM adjusts, the new interest rate is a sum of the borrower’s fixed margin plus the current rate of the index the mortgage is tied to.

If you are going to be paying an interest rate that has either already adjusted, or will be soon, you may want to consider refinancing to take advantage of the stability of a fixed-rate mortgage.

This is also a good time for borrowers who -- due to a poor credit score -- started out in an adjustable rate loan to transition into a fixed-rate loan if they can. If a positive track record of making mortgage payments on time and in full can been established, there’s a very good chance the borrower may now qualify for a loan with a lower interest rate.

With any decision to refinance, it is important to take the terms of the existing loan, the cost of the new loan, and your long-term needs into consideration. As a qualified mortgage professional, I will be able to explain the differences so you can choose the best the option for your needs.
Please give me a call at 763-515-5050 or 763-458-9007 to discuss your current situation.
As always, referrals to family, friends, neighbors and business associates are welcome!
Regards,
Steven