LIBOR is on the rise. In fact, according to Bloomberg:
"The overnight Libor rate in U.S. dollars soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers' Association. The one-week rate rose by more than a percentage point, to 3.88 percent from 2.49 percent on Monday, and the one-month rate increased to 2.75 percent from 2.5 percent."
Granted, most adjustable rate mortgages are not tied to the 1 day LIBOR... but most are tied to SOME part of LIBOR! So I suggest that you get out your note, and look to see what Index your Adjustable Rate Mortgage is actually tied to. Is it the 1 Month LIBOR, the 3 Month LIBOR, the 1 Year US Treasury Bill? While you're looking at your note, write this information down too:
- Margin Rate
- Caps
Now, once you know these things you can begin watching the LIBOR rate and see what sort of impact this whole AIG, Fannie/Freddie, Lehman Brothers is having on your pocketbook. You see, LIBOR stands for the London interbank lending rate. "Today's daily rate more than doubled, with smaller gains in the one-week and one-month rates, as lenders demanded higher compensation for risk after Lehman Brothers Holdings Inc. collapsed and the value of American International Group Inc. fell 84 percent in a week."
So a prolonged daily LIBOR at 6.44 will lead to a much higher 1 month average and 3 month average, and so on.
Let's say your loan was due to adjust in December, 2008. The bank will likely look at the LIBOR on October 1. If the LIBOR on October 1 is 3.5%, and your margin is 3.5%, then your new rate is likely 7.0%. If you received a 5-1 ARM in 2003 with a rate of 4.5% - this could be quite a jump in your payment!
But wait! There are caps! That's right - we had caps on the mortgages so that it couldn't go but so high at each adjustment. Many of those caps are 2%. This means that if your current rate is at 4.5%, the rate could go no higher than 6.5%... right. Well, if that's the way your caps read, that's correct. However, if your caps are 5/2/5... then your rate, with this first adjustment can go all the way up to 9.5%. Based on our little scenario above, with LIBOR at 3.5%, and the margin at 3.5% - your new interest will be 7%.
That's why I said, pull your note out and start reading it. With so many changes in qualifying guidelines during the last 5 years - you need to check with a lender NOW to see if you qualify to refinance, and if not, how much your payments are going to adjust to. We're all finding ways to tighten our belts, but if your famly has to absorb a $350 a month increase in your mortgage payment starting in a few months - you need to know what your options are!
If you want to find the best mortgage rates in Cary, NC, call Steve and Eleanor Thorne, Meridian Residential, 919-649-5058
Exceptional post. Got to reblog this one. Exceptional, Exceptional, Exceptional
Very good I'm glad I fixed my loans some time ago but a good reason to call my clients that have ARM's
I'm bookmarking this one. This is the most succinct, easy to understand explanation of how an adjustable rate mortgage functions that I have seen. Thank you for the excellent post!
Read and call for the refi........ time to get out of that arm and into the fix when your rate adjust the fix will now be lower
Hey Guys! Thanks for the kudos! I find that alot of folks don't understand HOW the ARM works. The Servicer typically looks at the Index 60 days before the adjustment - checks the escrows, then prints the new disclosures...