By Terri Cullen
More than $2 trillion of adjustable-rate mortgages come up for interest-rate resets in 2006 and 2007, according to Moody’s Economy.com. For homeowners who want to refinance to a fixed-rate loan, the timing couldn’t be worse — the average rate for 30-year fixed rate mortgages is at the highest level since 2003.
WHAT TO DO: If the rate on your ARM is about to move higher and you have no plans to move in the next five to seven years, locking in a fixed-rate mortgage may make sense. To find out how much more you’d pay refinancing to a fixed-rate loan, click here. Comparison shop for fixed-rate loans here. If you plan to move soon, don’t bother refinancing — it’s likely you wouldn’t recoup your closing costs. For borrowers with hybrid mortgages, which combine a fixed-rate and an adjustable-rate loan, the decision to refinance or wait until the fixed-rate period ends depends on whether it’s likely rates will continue to rise, or whether we’re nearing the end of the current round of rate increases, as some economists predict.
The Toll of Rising Rates
Simulated effect on adjustable-rate mortgage payments of a four percentage-point increase in the ARM Index, used as the basis for adjusting rates on ARMs.
|ARM BORROWERS||Change in Payment Below 5% of Gross Income||Change in Payment 5-10% of Gross Income||Change in Payment More Than 10% of Gross Income|
|In Bottom Half of Income Distribution||60%||24%||16%|
|In 50th-90th Percentile of Income Distribution||77%||20%||3%|
|In Top Decile of Income Distribution||68%||28%||4%|
Reprinted with permission.