That ARM loan could be a great bet

Take a closer look at you Adjustable Rate Mortgage; it might not be as bad as they make it sound.

I think with all the rush/push to refinance out of that Adjustable Rate Mortgage in some cases, are alarmist and for people that have ARM loans with either Fannie Mae or Freddie Mac (not subprime) you need to step back and take a closer look at your loan and consider what your payment is going to do and understand how it works. With these ARM’s it’s more likely that your payment is going to go down. The key here is to know how your ARM works; you need to understand how to figure out what your interest rate is going to be. The interest rate is figured by adding an Index this is the variable component of your interest rate and a Margin this is the fixed component of your rate. You need to know what your index is, the two most popular indexes are either the 1-Year LIBOR (London InterBank Offer Rate) or the 1 YEAR TREASURY (1yrCMT); this is extremely important because this is the basis of your interest rate.  The index is what’s going to determine what your rate is going to be. Today 02/24/2009 the 1 year LIBOR is 2.08 and the 1 yr CMT is 0.64. Here is a great link to use to keep track of your index for the 1 yr LIBOR http://www.bankrate.com/brm/ratewatch/other-indices.asp and here is the link for the 1 yr CMT http://www.bankrate.com/brm/ratewatch/1yr-cmt.asp . Now you need to know your Margin this is the amount you add to the index to get what your interest rate will be. Most of margins tend to be between 2.25 and 2.75; again this is for non subprime loans. (The problem with subprime loans is that the margins are extremely high).  To find out what your index and your margin are, look in your closing folder and look for the Adjustable Rate Mortgage loan Rider. Now for examples sake we are going to use a margin of 2.75, now if you have the LIBOR as your index you add 2.08 ( YOU NEED TO ROUND TO THE NEAREST .125 ) this would make your interest rate if it adjusted today 4.75% this is not a bad interest by today’s standards at all. Now if your index is the 1 yr CMT at .64 (ROUND TO NEAREST .125) your rate today is 3.5% can’t touch this in today’s market. This presents a compelling argument that ARM loan aren’t that bad at this time. The question here is how long the indices will stay low. For those of you under water in your property this is the good news. All the talk from the new administration about allowing people who owe more than their property is worth is still just that HAPPY CHATTER; we will have to wait to see if they can make it happen.  Now for those few who can still qualify for a new loan you need to form a strategy of when to refinance into a fixed rate. You’ll also need to know how often your interest rate can adjust; it’s generally either every 6 or 12 months. What you want to do is enjoy your new rate but watch and lock in a new fixed rate loan when those indices start moving up to a point where your adjusted rate will be higher than what you can fix a rate at. Easier said than done; this is where you have to determine what works best for you. Also ask yourself all those important questions, like how long do you intend to stay in the property, how much are the closing cost going to be, ect… Loan to value and credit score are still extremely important and well affect your interest rate. The sweet spot is still 80% or less, whenever you go over 80% you run into mortgage insurance and this just adds to your payment. There are many factors that affect your interest rate and even your ability to refinance. If I can be of any help in determining what works in your best interest please contact me.

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Thank you and I hope this helps Andrew Hahn