Refinancing from ARM to a fixed rate

Those rates looked so good when you signed the loan papers just a few years ago. ARM indexes during 2002 and 2003 were at record lows. You could get incredible deals for 1 year and 5 year ARMs but those rates are a thing of the past. You could have a very nasty surprise waiting for you at the end of the fixed portion of your ARM.

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You can still get relatively low rates on 30 year fixed rate mortgages and it might be time to bite the bullet. Your monthly payments will go up but they’ll stay at a fixed rate for the life your loan. In the long term, this could make the difference between keeping your home and losing it.

Let’s say that you took out a $150,000 loan in June of 2003 and you locked in a really great rate of 3.2% for 5 years. You could have done that with a 1 year LIBOR loan. At that time the 1 year LIBOR index was only 1.20%, add on a 2% margin and that’s how you get the 3.2% rate.

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During those first 5 years you would have a payment of only $648. But at the end of those 5 years, in 2008 your rate could easily go up to 7.4%. As of April 2006, the 1 year LIBOR was sitting at 5.4%. Add on your 2% margin to get that 7.4% rate. Your payments could jump from $648 to $985. The worst part would be that there’s no guarantee that they would stay there. If you loan capped at 12%, you could be stuck with payments of over $1,400.

However, if you act quickly and move to a 30 year fixed rate loan, you could get the best of both worlds. You wouldn’t get the full 5 years of low rates but you would still have several years of low monthly payments but you’d get out from under the ARM before the worst rate hikes hit. We’ll assume that you’ve paid off some of the principal so the amount you would borrow would be less than the original amount. The monthly payments on a $141,000 30 year fixed rate loan with 6.15% interest would be $859. It’s a big hike but it won’t get any worse over the long haul.

Of course, all of this is a gamble. Rates could go down. How lucky do you feel?

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