Economist believe rising interest rates will continue, and when Adjustable Rate Mortgages (ARM) start to adjust, the new interst rates will be significantly higher. For unprepared homeowners this could pose a risk of default and eventually foreclosure. Now could be the time to refinace out of the ARM and get inot a Fixed Rate Mortgage (FRM) while long term rates are still historically low.
To really understand an ARM, you need to know two things. The Index and the Margin. The most common index is the 6 month LIBOR. Indices move up or down based on economic factors, and back in September 2003, the 6 month LIBOR was at 1.1795, compared to August 2006 at 5.4501. The margin is the fixed component of the adjustable and does not move (the margin is disclosed on your Mortgage Note. So when the index and the margin are added together and greater than your current rate, you can expect an average of 2-5% increase in your mortgage payment at time of adjustment.
If you have an adjustable rate mortgage, you need to consider your short term and long term goals. Refinancing might be your best option.
It is estimated that 2 trillion dollars of ARM loans will re-adjsut and be eligible for refinance in the next 18 months. Now may be a great time for many borrowers to get into a more stable mortgage.
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