Wednesday, September 12, 2007

Many of you have ARM’s, or “Adjustable Rate Mortgages” that up until recently were very popular choices for mortgages. My current database of customers is riddled with ARMs that are in the 3% to 5.5% range. Some of them are ”option arms” or ”interest only”, others are traditional 5/1 ARMs. All of them are without pre-payment penalties. (I discourage prepay-penalties, even when they may mean a lower rate.) So what if you have an adjustable rate mortgage? Is it still a financially strong mortgage? Are you prepared for your mortgage adjustment?
Or Do You Have an “Olive Oyl” ARM?
(I love saying that.)
If you’ve been shopping for a mortgage you’ll find in many cases, that ARMs have higher rates than the more conservative 30 Year Fixed Mortgage. (as of Sept. 12th/07). This is largely do to a Wall Street driven stance on what’s considered risky for banks. Furthermore, ARMs just aren’t that profitable to lenders right now. So let’s focus on the ARM you currently have. In order to asses the “strength” of your ARM you need to know the terms. When will you adjust? What is your index? What is your Margin? You’ll discover these terms by referencing your “Adjustable Rate Loan Disclosure.” (you signed this when you closed on your loan. For those of you in my database, contact me, I can pull this disclosure from my archives.)

Ok, first things first, you need to determine exactly when your adjustment date is. If you’re within a year or two, I recommend exploring your options. Lending guidelines have been changing rapidly, and although rates remain historically low, the future is unknown. Consulting with a Mortgage professional or even a reputable Financial Planner can help you determine your best options.

Secondly, your INDEX. Most ARMs are tied to either the MTA index, or the LIBOR index. Ok, the “what?“ & “what?” index? The MTA is the “Monthly Treasury Average” and it’s the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. What your really need to know is where the MTA is through the month of August 2007: 4.933%

The LIBOR is the “London Inter Bank Offering Rate” and it’s an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. There are a few different averages used for this index, so make sure you know which one you have. (6 month and 1year are the most common.) The 1 Year LIBOR as of 9/11/07 is: 5.06938

So, you know your adjustment date, and your figured out your Index. Now what? Now you need to add the margin to the index. The margin can be found on your ARM disclosure we mentioned earlier. Usually, it’s around 2.25% or 2.5%. If your index is the MTA, then you take 4.933%(index) + 2.5%(margin) = 7.433%.

I posted the above photo of Olive Oyl flexing her arms because I believe it humorously depicts many of the adjustable rate mortgages out there. The image of her flexing muscles and showing strength doesn’t hide the fact that she has very, very skinny arms.
7.5%…that's probably a considerable jump in your monthly payment for many of you. That’s why it’s important to know the strength of your ARM.

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JD Power @ Associates

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