Will You Be Able to Adjust?
Much of the country is currently experiencing a slump in new home sales as a result of increasing interest rates. The same increase that is slowing new sales will also cause many new homeowners a significant increase in their current payments when their ARMs begin to adjust to higher rates.
In a recent article, CNNMoney.com reported that,
The Mortgage Bankers Association estimates that some $330 billion worth of ARMs will adjust in 2006 and $1 trillion worth will reset by the end of 2007. With a $200,000 loan adjusting upward from 4 percent to 6 percent, the monthly bill would increase to about $1,200, from $955.
A 20% monthly increase in payment would seriously impact the budget of the average homeowner. With recent low rates and flexible loan options that allow for interest-only or minimum payments, many new homeowners stretched their budgets to the max and purchased a more expensive home than they might have otherwise. Few families, even those with two incomes, would be financially comfortable with a sudden decrease in discretionary income of several hundred dollars a month. Many will be strained beyond what they can reasonably manage.
The Libor, one of the most used indices for mortgages, was 1.279 in July of 2003. Now, 3 years later, it is at 5.591, a rate increase of over 4%. Even if a homeowner has a minimum amount of equity in their home and would have to pay closing costs out-of-pocket, s/he may need to seriously consider refinancing now.
It is important for any homeowner, but especially a first-time homeowner to review his/her mortgage note and terms of any adjustable rate mortgage. S/he needs to know:
- The index on which their rate is based? (i.e. Libor, Treasury, COFI, etc.)
- What’s the index now?
- What is the margin on their note?
- When is the first adjustment date?
With that information, s/he should be able to roughly calculate what the new rate will be and then, by using a free mortgage calculator, determine what his/her new payment will be. If the payment increase causes concern and/or budget issues, the homeowner should immediately contact his/her financial advisor and/or mortgage professional to review financing options and solutions.