If you’ve had an Adjustable Rate Mortgage (ARM) since the financial crisis hit in 2008, you had a great ride. For those that had annual adjustments, rates over the last 7 years have rarely exceeded the low 3% range, and for several years were in the high 2’s. Unfortunately, the party is coming to an end in 2016. After remaining below 1% for the past 7 years, the one-year LIBOR index has finally started to rise. This is the index that most adjustable rate mortgages are tied to. Last year at this time it was .84%, today it is 1.48%, almost a .75% increase. To calculate what your rate will be each year, the typical ARM will adjust to what the one-year LIBOR index is, plus a margin of 2.25%. So, if your rate is adjusting later this year, it will be 1.48% + 2.25% or very close to 3.75%. That is up from a rate of 2.875% last year. You will want to check your paperwork to confirm that this is how your particular loan would adjust to be sure. The document to look at is your Adjustable Rate Note.
Why is this happening when other rates are steady or even falling at times? It has to do with regulatory changes going into effect in October that will be rolled out by the Securities and Exchange Commission (SEC). The changes are designed to prevent the type of run on Money Market Funds that happened in the wake of the financial crisis in Sept. 2008. The LIBOR index measures the cost banks pay for financing. The new rules greatly reduce the attractiveness of these money market funds, driving up the cost foreign banks are paying to borrow, hence the movement in the LIBOR. The good news is that long-term rates have not yet moved up and are hovering near all-time lows right now. This creates a unique opportunity to lock in a long-term rate where you currently are with your ARM or possibly lower than where your ARM will be adjusting next. .--- SDE
Robert D. Bordett CFP, CDFA
Collaborative Practice and Mediation Services