What to Expect for your Conforming 2004-2006 ARM in the Bay Area

What to Expect for your Conforming 2004-2006 ARM in the Bay Area

Pending ARM Adjustment Spring/Summer 2011

When Bay Area mortgage applicants choose an adjustable-rate mortgage over a fixed-rate one the past few years, he accepted a risk that — at some point in the future — the mortgage’s interest rate would rise. Lately, though, that hasn’t been the outcome.

Teaser Rate

Since mid-2010, conforming mortgages have adjusted below their initial “teaser” rate consistently, giving homeowners in California and nationwide reason to ride their respective adjustable-rate mortgages out.

For example, this month, conforming 7-year and 5-year ARMs are adjusting near 3.011 percent based on the most common loan terms of 2004-2006. It’s because of how adjustable-rate mortgages are structured.

Adjustable-rate mortgages follow a defined lifecycle. First, the ARM’s mortgage rate is pegged; held fixed for a set number of years. This period ranges from one year to 10 years; periods of five and seven years are most common.

When the initial fixed-rate period ends, the mortgage rate then adjusts based on a pre-set formula. The formula is established by contract in the mortgage closing paperwork, and is commonly defined as:

(Adjusted Mortgage Rate) = (2.250 percent) + (Current 1-Year LIBOR)

Next, every 12 months, based on the same formula as above, the ARM adjusts again until 30 years have passed and the loan is paid is full.

The Prediction of Libor

It’s important to recognize that in the above equation, LIBOR is a variable so as LIBOR goes, so goes your adjusted mortgage rate. And because LIBOR is ultra-low right now, adjusted mortgage rates are ultra-low, too. LIBOR is expected to stay this way until the global economy has recovered more fully. Analysts predict a higher LIBOR by mid-2012.

I love to work with my readers

So, if you have an adjustable-rate mortgage that’s due to reset this season, the rush to refinance may need to be looked at more closely.  There are many pieces to analyze in the refinance puzzle.  where will rates be when your loan is set to adjust, what is your job situation, is the equity on your property in question and more. Give me a call or message me below today. I would be happy to look at your situation and help put a plan in place for your mortgage.

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