THE CREDIT CORNER

ARMs & the FED
By
Chris Seymour, President
Country Mortgage, Sedona

A frequent question is: “My existing mortgage is an ARM and I’m scared that it’s going to adjust up and spike my monthly payment higher than what I can afford. Should I refinance now to a fixed rate?

This is a complex issue because we first need to examine the likely behavior of the ARM reset based on current interest rates, the timing of the anniversary date of the reset and the future interest rate predictions. Existing ARMs are generally benefiting from the Federal Reserve’s ease because the index values that drive their resets are dropping dramatically. This means that any resets in the next 12 months will not increase the rate and payment but actually may lower it. As long as fed funds and short term T-bill remain in the 1-2% area, ARMs will retain value. It’s when the fed starts to tighten again (not anytime in the foreseeable future), you’ll want to look at other fixed rate options. Unfortunately at that time, fixed rates will already be higher. The give and take of timing this is locking the fixed rate when it is most attractive and before the fed moves rates higher. You’ll probably give up an attractive ARM rate in doing so. If you intend to be in your home for a long period of time, the long term benefit of reducing your interest rate risk will be worth it.

Please feel free to email me questions about anything associated with real estate finance. I’ll reply to you personally and answer the most common questions every other month in future columns. My email is chriscountrymtg@aol.com