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Payments for adjustable mortgages rising again
By Jeff Lazerson
What I think: For the last 10 years, any borrower who had adjustable-rate payment change anxiety learned that the worry was for not. I can’t remember a single borrower who called me and said his or her payment went up.
Thanks to a near-zero inflation rate, payments actually went down for borrowers who had 5-, 7- and 10-year adjustable-rate mortgages, or ARM’s that are fixed for the initial period and fluctuate annually thereafter.
The one exception was the now-outlawed sub-prime, predatory lending adjustable-rate mortgage that had an obscenely awful adjustment calculation hitched right behind a terrible prepayment penalty.
Well, that was yesterday.
Today, I am sounding the alarm. You know, mayday, stat, 911, Code 3 and all those adrenaline-pumping terms.
Whether your loan is tied to any of the Libor, U.S. Treasury indices or prime rate benchmarks, your rate will certainly be going up, up and away if you have an adjustment calculation period coming anytime between, say, now and the next couple of years.
For example, just one year ago, the 1-year Libor (or London interbank offered rate) was at 1.80 percent. Today it’s at 2.66 percent.
The 5-year Treasury was 1.85 percent. Today it’s 2.61 percent.
And the prime rate was 4 percent. Now it’s 4.75 percent, with clear expectations of higher rates ahead.
And, don’t forget to add the profit margin to your adjustable index to arrive at the new fully indexed rate.
Don Martinson and his wife recently decided to sell their Westminster rental condo after their payment went up last June. They now pay 3.98 percent for an ARM tied to the 1-year Libor. If their loan were to adjust today, it would be at 5.16 percent (2.66 index plus 2.5 margin).
“Libor goes up every week. I don’t know what is going on with Libor,” Martinson said. “I’ve noticed this for two years. I don’t have a grasp on interest rates going up or down.”
If you are in the market for a new loan, be it purchase or refinance, you can still get a 5-year or 7-year adjustable that is one-half percent or more lower than a fixed rate. You just have to decide what your risk appetite is for the uncertainty of rates possibly going up when your ARM adjusts.
Perhaps 15 or 20 years ago, most borrowers couldn’t wait to jump out of their ARM loans because their payments were exploding. Those who experienced income declines or suffered major negative credit events were forced to sell their homes because they either couldn’t afford the new payment or could not qualify.
As far you’re your home equity line of credit goes, do a deep dive on the average interest rate between your first mortgage and that ever-adjusting HELOC. You might be better off rolling both loans into a single first mortgage at a lower rate.
If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.
Jeff Lazerson - Mortgage Columnist since 2011