Time to Refinance ARMS

Thousands of Homeowners in our area still have Adjustable Rate Mortgages. Over the past two years I have often wondered why many people are keeping their ARM instead of refinancing to a fixed rate.

One of the reasons may be because their payments have decreased. There are many indexes but the two most common around here are the CMT and LIBOR. The math can be a little complicated but the historical figures are easy to document. The 1-year CMT index usually has a margin of 2.75 and caps of either 5 or 6 above the start rate. If your start rate was 5% then you are a happy camper because the current index of .37 plus 2.75 equals just a little over 3%. But do not forget, the maximum rate is either 10% or 11% over the life of the loan!!

The one-year CMT index has only been below one percent 11 months out of the past 20 years!!! Another way of saying it, 95.5% of the time over the last 20 years the index has been above 1%.

Just for kicks, I averaged this index for the month of January over the last 20 years and the result is 4.34%. If we add 2.75% (the margin) to that average it is over 7%. The conventional 15 year fixed rate is currently lower than the 4.34% average index (not including the margin) for the previous 20 Januarys.

It is fun riding the rate down on an ARM, but when rates rise, so does the index and that makes it hard to switch to a fixed rate. If you have an ARM and plan on keeping your home more than another five years, there is a very high probability it will cost an arm and a leg if you do not switch now while rates are low.