SHOULD I GET OUT OF MY ARM?

The sky is not falling! Look, I realize that the past few months have been rough. Everywhere you turn, from the media to billboards and radio ads, people are telling you to get out of your Adjustable Rate Mortgage. I personally like the advertisement on the radio where the guy says, in his southern drawl, “You made a killing on that ARM, now it’s time to get out of it.” Well, the reality is that many people did save a lot of money by utilizing an Adjustable Rate Mortgage, and for many of those people the fear of increasing payments is a legitimate concern. That being said, not everyone should run to get a fixed rate mortgage. In truth, it all depends on what your reason was for getting an ARM in the first place.

Here is an excerpt from a report on ARM’s that I sent to my Inner Circle a few months back (as always, if you want to be included in the Inner Circle, send an email to jayhart@cottonwoodmtg.com)

There are two times when an ARM can be beneficial to a home owner: When you are not planning on remaining in your home for an extended period of time, and when you require an increase of cash flow. . . . Consider the words of Alan Greenspan: “Research within the Federal Reserve suggests that homeowners might have saved tens of thousands of dollars had they held adjustable rate mortgages rather than fixed rate mortgages during the past decade.” While it may be a stretch to assume that Mr. Greenspan is suggesting that all homeowners choose a loan program with an adjustable rate, it is important that a homeowner consider the potential benefits from considering an ARM.

The same remains true today. If you are in your ARM for the right reasons then why jump ship now? The way many homeowners are hitting the panic button reminds me of the football coach who replaces his quarterback after one intercepted pass. I don’t know how many times I have said it: Your mortgage should be a part of your overall financial strategy. If the “business plan” for your family and home included an ARM 2 years ago, what has changed now?

I was breaking down the numbers for a client the other day—she was adamant that she needed to trade in her ARM for a Fixed Rate loan. Her rate had adjusted 2% over the past two months. Her payment had increased accordingly. However, in spite of the adjustment, her rate was still ½% lower than the fixed rate that she would have received. In addition, she is planning on selling within the next year. She would have paid at least $2,000 to refinance, only to pay closing costs again when she purchases her new home. In this case, refinancing made no sense.

That being said, for many homeowners, now is the time to switch to the Fixed Rate loan. If your income or debt level has changed, or you no longer anticipate selling your home then you may want to restructure your loan. If your new adjusted rate is higher than the rate you could get on a fixed loan, then you may consider restructuring.

All I am saying is, don’t panic. Don’t assume your loan officer was lying or ripped you off. If you did your homework and your Loan Officer did his or her job properly, then you knew this could happen. Take a step back, look at your options and weigh them against your current situation and needs. If you still need to refinance, then do it sooner rather than later—there is no guarantee that rates will stay as they are.