Kieber: Is it time to break your ARM? (column)
Sounds a little dramatic doesn’t it? I am not talking about your extremity but your Adjustable Rate Mortgage. If you purchased a new home or refinanced a few years ago and you took advantage of the extremely low interest rates you got a great deal.
If you are coming close to the first adjustment period, you just might see your mortgage interest rate jump by 2 or even 3 percent. And then the following year you could also see a similar increase in the mortgage interest rate.
I suggest that if you are the owner of an ARM you pull out those mortgage documents and spread them out to determine the adjustment dates. Is the adjustment date coming up in the next few months? Then you need to determine what that adjustment will be.
If the current interest rate is say 3 percent and you have a 2 percent increase you would see an increase in your payment of over $110 per month. Then the following year it could increase by even a larger amount.
Also, look for the maximum cap rate for the ARM. Most ARMs have a cap rate of around 6 percent. A current mortgage interest rate is say 3 percent — within a matter of just a few short years that rate could jump to 9 percent. That is a dramatic increase in rate and your out-of-pocket cost.
Now if your current mortgage is an Adjustable Rate mortgage and you have a great low rate and you are planning to sell the property within a year or so, refinancing into a longterm mortgage may not be the thing to do.
I always work with borrowers to determine the time it will take to recoup the expense of the refinance. If you save $150 a month by refinance, and the overall cost of the refinance is $1,500, your break-even point is 10 months. If you sell prior to then, you lose. If you hold that property for a longer timeframe, you win.
I recommend that you gather up your mortgage documents and contact your friendly neighborhood mortgage banker. Sit down with them to review the dates and rate on the ARM and then figure out if a refinance is cost effective.
Robert (Bob) Kieber is a long time resident of the Summit County and has been closing mortgages for over twenty years in Colorado and nationwide. If you have a questions Bob can be contacted at 970-485-1312 or e-mail him at rkieber@boeMortgage.com.
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