HELP! My ARM Mortgage Is going to adjust! HOLD ON WAIT, it may not be as bad as you think.

Hello,
Below is a response to one of my best clients adressing his concerns about his current ARM (Adjustable Rate Mortgage) and whether or not he should refinance out of it to a higher 30 year fixed rate mortgage. Unfortunately, like many people across the country, his mortgage balance is roughly equal to the value of his home making it very difficult if not impossible to refinance his mortgage. But that's ok, because the only reason he wanted to refinance his ARM was because of all the negative press in the media about ARM's and how "bad" they are. I don't completely agree and below is why. Let me know what you think.

P.S. This new housing bill could really help borrowers and the real estate market. I'll be posting a bit on that very soon.

TEXT OF RESPONSE

I'm sorry to hear that you are stressed out about the loan on the condo. Unfortunately right now there is absolutely nothing that you can do about it. I'd recommend trying to put it out of your mind for at least the next year and really for two years. Look at it this way you have one year left on the current loan with a nice low interest only payment at 5%. Even when the loan adjusts in a year I don't think the rate is going to go up so much that it's going to be any worse then having a 30 year fixed rate loan on it today. Let me see if I can explain. If you did a 30 year fixed rate loan today your rate would be around 6.5 % with full principal an interest payments versus now you have the ability to pay interest only. If your loan were at the end of the 5 years today and was adjusting based on the current LIBOR index rates it would adjust to around 5.53%. That is a full 1 point lower than the rate you could get on a 30 year fixed rate today. Keep in mind this is on today's rates. I don't think the underlying index will go up very much between now and next year but even if it did go up a full point you would still adjust to the exact same rate that you could get now. Once you adjust you have one full year at that new rate and payment. So you have at least 2 years until you really have to worry about anything. Two years is a long time. More than enough time for the values to increase making it possible for you to refinance if rates make sense or for you to sell. So in short, put it out of your mind, focus on getting it rented and enjoy spending time down there with your family.

I know it's not the ideal situation but trust me it's really not that bad. Even if you could refinance it now to a 30 year fixed but you planned on selling in the next 2-3 years I'm not sure it would make sense because your giving up a 5% rate for a 6.5% rate that you will keep for 2-3 years. Even if you were to adjust next year to say 7.5% (which is unlikely) you would still be exactly the same for the next 2 years when compared to refinancing to 6.5% today. Ok I think you've got the point but the same thing goes for your house. DON'T WORRY about it. You have the same situation with this loan as you do on your condo. Since current rates are around 7% for $575,000 loans you have essentially 7 years of security. Your rate would have to adjust in 2012 to 8.5% and stay there for 3.5 years in order for your average rate over that time period to be equal to 7%. Does that make sense? So you would be indifferent between refinancing to 7% today on a 30 year fixed and keeping your current loan until 2012 and then having it adjust to 8.5% for the next 3.5 years. I don't think that will happen thereby making you better of staying exactly where you are until an opportunity arises that makes you better off, not worse.

Call me if you have any questions about any of this and I'll gladly go over it with you. So the short of it is, put it out of your mind for now, and I'm absolutely certain it will all work out in the end