Weekly Rate & Market Update 3-4-16

Question of the week: When should I refinance my adjustable rate mortgage?

Answer: This is always a challenging question to answer, and like most questions the answer is very situational from person to person.

Those who have been in adjustable rate mortgages for the past several years have seen extremely low rates as the indices upon which their ARMs are based have been near, or below, 1% for a long time. Now looking forward homeowners with ARMs hear about rates going up and are wondering how soon, how fast and for how long the rate on their mortgage will increase. Risk management dictates fixing the rate while long term mortgage rates are still low.

However by fixing the rate and payment for the long term chances are most ARM mortgages will convert to a higher payment. So the dilemma of when to increase your mortgage payment to avoid future rate and payment increases versus stretching out as long as possible the lower rate and payment on your current mortgage.

Here’s a bunch of math:

Example, you bought your home in 2008 with a 5/1 ARM at a rate of 5.5% on a loan of $450,000. For several years you paid interest only and over the past several years have started paying principal on the loan balance and now owe about $415,000.

The loan went from fixed to adjustable in 2013 and the rate is based on the 1 Month LIBOR plus 2.25%, the lifetime cap on the rate is 10.5%. Your rate can adjust only once a year on the anniversary of when you first funded the loan, and the adjustment cannot be greater than 2% higher than the rate the year before.

Your loan rate is currently last year’s LIBOR, 0.17%, plus your margin of 2.25% for a rate of 2.42%. You received notice from your lender that your rate is scheduled to adjust with your April 1st payment and since LIBOR has increased to 0.44% your rate for the next year will be 2.69%.

Knowing the maximum rate increase of 2% this means that from April 2016 to April 2018 the highest your rate can be is 4.69%.

Your current payment, fully amortized for the remaining 22 years at your new rate of 2.42% will be $1681 per month effective April 1st.

Should you refinance to fix the rate? If you were to refinance today at no points/fees you are looking at a rate of around 3.875%.

If you refinanced your $415,000 balance at 3.875% in a new 30 year fixed rate mortgage your monthly payment would be $1952 per month, an increase of $271 per month and an additional eight years on the loan balance.

If you want to fix the rate and do not want to increase the term of the mortgage and amortize your payments for 22 years your payment will be $2338 per month, an increase of over $650 per month.

As you can see the decision to fix your mortgage rate at today’s low rates is not as easy as it may seem since to do so will most likely raise your month payment several thousand dollars per year over your current rate. To analyze the decision you should approach the conversion from adjustable to fixed rate as you would with insurance. How much more in premium are you will to pay for how much more coverage should you need the insurance? There is a cost benefit analysis that has a very big unknown, in this case when, how fast and for how long will rates move up forcing you into increasing payments on your home?

Wading through the math may or may not make your decision easier, in the end it comes down with your comfort level of unknown future payments and what your tolerance is for higher payments.

Keep in mind that short term rates will always be chasing long term rates. So while your adjustable rate may be below 3% today and the fixed rate is just below 4%, in the future when your adjustable rate is near 4% the fixed rate will be near or above 5%.

If you would like to do the math on your adjustable rate mortgage, or have a friend or family member who may benefit from an analysis of their mortgage, please contact me.

Have a question? [email protected]

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

First Friday means jobs. The monthly employment report was released by the Labor Department today and the news was good. The economy added 242,000 jobs in February and 30,000 jobs were added to the January and December reports. All the data points in the report were positive which boosts the chances of the Fed raising rates again in a few weeks. The news is mortgage rate unfriendly.

Rates for Friday March 4, 2016: As stock prices have climbed this week Mortgage Backed Securities (MBS) prices have dropped (higher rates). After dropping or staying flat for the past 10 weeks of the year rates bump up this week. Looking at the chart this is the first Friday since Christmas where rates are higher than the week before. I’m not looking at a trend upward just yet, but we might have bounced off a near term low last week.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.50% Up 0.125%
30 year high-balance conforming 3.75% Up 0.125%
30 year FHA 3.25% ** Flat
30 year FHA high-balance 3.25% ** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have no points and credit towards closing costs, recent rate change reduces credits

I had a very unique experience yesterday thanks to my friend Mark. Thermal, California is not a destination spot for many people—it is about halfway between Coachella and the north shore of the Salton Sea. But it was the destination for a group I was fortunate to be part of as we played at the BMW Performance Track. Never a big car guy I sure enjoyed putting various performance BMWs through different exercises and cranking up the speed on the track to then stand on the brakes into a hairpin turn.

One lesson that applies not just to driving a car, performance or family van, but to many aspects of life is not to focus on the object in front of you but look as far down your path as you can to see what is ahead. Looking at what is right in front of you can cause you to bump into something else, looking ahead allows you to determine where you will go that is to your benefit.

Keep your eyes up this week,

Dennis