Time to look at your mortgage?

By Walt Lydic
Special to the Coastal Point

These are some of the reasons why homeowners and new homebuyers opted for an adjustable rate mortgage (ARM) back in 2002 or 2003. Now it may be time to re-evaluate. The Federal Reserve has increased the short-term rates six times in the past eighteen months, and the one-year Treasury Bill (the index used in most ARMs) has also been steadily on the rise. At the same time, the 30-year fixed rate, according to a recent survey by the Mortgage Bankers Association of America, is at its lowest point in 11 months and is only a quarter point off its 40-year low.

If it is nearing time for your ARM to adjust, be prepared for a rate increase. If your 3-year loan was originated in 2002, it is now going to adjust every year. As the Fed is getting aggressive with the short-term rates, it is time to reevaluate just how well you can mentally handle the yearly payment uncertainty. Remember, a 2 percent increase in rate could mean a 25 percent increase in payment. If however, you got your loan in 2003 when rates hit bottom and you have another year or so before it changes, it may be worth the risk of keeping it and hope that the long-term rates stay low when it comes time for you to refinance.

Sussex County has seen an explosion in the building of condominiums over the past few years and the sales have been so robust, few builders have been willing to go to the expense of getting prior Fannie Mae approval. Fannie Mae approval doesn’t mean the condo is any better, it just means that a wider array of mortgage products would be available to the homebuyer.

Most new condo buyers in our area purchased their homes using ARMs, as they may have been the only types of loans available at competitive rates at that time. If the project is now completely sold out, all the common areas are completed, and the investor content is not too high, those homeowners may be able to secure long term fixed financing and new buyers in the project will also find that fixed rates at market prices are available.

So if you were required to take an ARM to make your condo purchase, you may now have the opportunity to refinance or convert into a fixed rate at a time when rates are in your favor. If your ARM carries a conversion option you may be able to move into the fixed rate without the expense of a refinance. However, it is essential for you to review the details of your conversion option; many carry formulas that could bump your new rate significantly higher than what you could get in the market.

It may, in fact, be cheaper to refinance into a completely new loan than to exercise the conversion option in your existing loan. Remember, the appreciation in eastern Sussex should allow you to cover the cost of the refinance in your loan without taking anything out of pocket. In any case, we are at a rare time for interest rates, one in which the short term rates and the long term rates are going in opposite directions with the spread between the two ever narrowing. The tide is at the flood, fortune is knocking and you might want to open the door. Contact your mortgage professional for a free consultation.

Walt Lydic is president of Kaylor Kent Mortgage in Ocean View and is a National Association of Mortgage Brokers’ Certified Mortgage Consultant. He can be reached at 539-9120.