By Alicia Lanier, REALTOR
Are there any among us who are untroubled by the ongoing news stories about the country’s economic distress? I would say not. But the individuals who are most concerned are those whose adjustable rate mortgages are about to “reset” to a higher interest rate. Many are now considering more conservative options, like refinancing to a 30-year fixed-rate loan.
Financial experts recommend that homeowners who are concerned about their ability to continue making their mortgage payments do the following: try to refinance an adjustable rate mortgage into one that is fixed for a set amount of time; create a household budget to help determine the debt-to-income ratio; avoid using credit cards, which can add unnecessary stress when the bill arrives; keep an emergency fund of liquid assets with enough to cover three-to-six months worth of household expenses; and only purchase necessities.
If your loan is due to reset, avoid mortgage shock and make sure you know what index your loan is tied to, says the California Association of Realtors (CAR). It is important that homeowners who have adjustable-rate mortgages (ARMs) are aware of the index to which their mortgage is linked, as this determines the monthly payments. Payments of loans tied to the LIBOR, which is in the interest rate that banks charge each other to borrow money, could increase if the loan resets in November or December because of the recent increase in the index’s rate. Most ARMs are set to the one-month, three-month, or six-month LIBOR. Homeowners who are concerned about possible payment increases should contact their local bank, credit union, or mortgage broker to rewrite their ARM into one with a fixed interest rate, if possible.
Rates on adjustable-rate mortgages are determined by two factors –the loan’s index (LIBOR, COFI, Treasury) and the lender’s margin. A guideline to help determine the new rate when a loan resets is to add the lender’s margin to the new index. For example, if a homeowner’s ARM resets according to the six-month LIBOR index, which was 3.70 percent as of Oct. 22, and the lender’s margin is 2.5 percent, then the new rate would be 6.20 percent.
CAR says some mortgage brokers recommend that homeowners who have ARMs and are unaware of to which index their loan is set, should review their loan documents again to determine if they should consider refinancing into a new loan with a fixed rate or possibly one linked to a different index.
Alicia Lanier is a REALTOR, e-PRO, and member of the Coldwell Banker Sterling Society which places her among the top 11% of agents internationally Contact her at Alicia.Lanier@cbnorcal.com or 408-491-1634
