When should you consider refinancing your ARM?

It is predicted that 10’s of Millions of Adjustable Rate Mortgages will expire or readjust some time over the next two to three years. Do you know the exact terms, caps and index of your ARM? In order to calculate where an expiring ARM would readjust, you must know the margin assigned to your ARM (generally 2.5 – 3.0%), your adjustment caps (5/2/5 or 2/2/5 etc), and the current rate of the index that it is tied to (LIBOR or Treasury). Calculating what will happen with a readjusting ARM can be a little tricky. 
 
In today’s mortgage / bond market, the average 3 or 5 Year ARM would recalculate to an interest rate of 7.625%. This rate adjustment is calculated off of a 2.5% Margin + 6 Month LIBOR Index Rate of 5.05% rounded to the nearest .125% (2.5 + 5.05% = 7.55% rounded up = 7.625%) This rate also assumes that the first rate adjustment cap does not come in to play. For round even numbers, a $300,000 mortgage at rate of 7.625% has a principal and interest monthly payment of $2123.48.
 
If you choose to refinance your ARM before it expires or originate a new mortgage today (3/30/2006), you could lock a 5 Year ARM at an interest rate of 5.875% or a 30 Year Fixed Rate Mortgage at an interest rate of 6.25% (both rates assume good credit & employment w/ income). The respective principal and interest payments on a $300,000 mortgage for these two rates are: $1774.61 ($348.87 less than 7.625%) and $1847.15 ($276.33 less than 7.625%).   
 
Should you be considering a refinance of your Adjustable Rate Mortgage? That is a question that requires an examination of your current loan and its terms, the current bond / mortgage market conditions and your plans for the property. All of these factors must be taken in to account before the decisions can be properly made.    
 
Please do not hesitate to contact DesPortes, Selig and Associates for a Mortgage Check-Up to see if refinancing an ARM is in your best interest.

William DesPortes
DesPortes, Selig & Associates
Professional Mortgage Services
Managing Member
970-949-0653
wdesportes@qwest.net

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