If you have an adjustable-rate mortgage or ARM, there’s a chance it will be heading toward a rate reset in the coming year. A reset is defined as the change in the interest rate of your mortgage loan after the initial fixed-rate period to the adjustable rate you will pay for the remainder of the life of the loan. And this year, as rates have increased, such a reset could cost you more money.
This rate reset carries significant implications to homeowners, as the indices used to determine adjustable rates have been steadily climbing during the past five years. For instance, the prime rate has more than doubled, from a long-time low of 4 percent in July 2003 to its current 8.25 percent as of February this year. This means that if you acquired a mortgage with an initial interest rate of 6 percent that resets in the coming year to prime plus one, your rate jumps over 50 percent in size, to 9.25 percent, variable.
According to the Mortgage Bankers Association, more than one trillion in ARMs are scheduled to reset during 2007. Some borrowers may be prepared to take the rate increase in stride; others may not wish to absorb the higher monthly payment and larger total finance cost that the increase will entail.
Interestingly, despite fixed rates being potentially higher now than when you took out your existing mortgage, you can end up in a financially superior position than you would have by simply letting your loan reset to the higher variable rate. This is because, as economists are pointing out, we are currently in a rare-rate environment known as an inverted yield curve. More simply put, this phenomenon means that certain economic factors have come together to bring long-term interest rates more in line with short-term rates. As defined by SmartMoney.com, “At first glance an inverted yield curve seems like a paradox.” Why would lenders offer a lower rate long-term while short-term rates remain relatively static?
The answer is that lenders will settle for lower rates now if they think rates and the economy are going even lower in the future. They’re betting that this is their last chance to lock in rates before the bottom falls out. The net result? Though short-term rates might be currently on an upswing, long-term rates have actually been on a decline. This may be the time for you to refinance into a longer-term fixed-rate loan.
Additionally, refinancing a resetting mortgage may be a good opportunity to consolidate any higher-interest consumer debt you may have. When you look at your complete financial picture, it’s not just asset management that maximizes your money. Managing your liabilities diligently can also take you a long way toward reaching your financial goals.
If your mortgage is one of the millions set to reset this year, now may be a good time to look over your mortgage in light of your entire financial picture.
For more information, please call Brian P. Jacobs at 661-290-2022.