WASHINGTON May 11 Remember way back in 2006,
when everyone was in a frenzy to buy a house, any house, with
whatever mortgage they could grab? In many cases, it meant
signing up for adjustable-rate mortgages that would reset in
half a decade.
Move forward those five years and here we are. For the next
13 months, some $20 billion in adjustable-rate loans are
scheduled to reset every month, according to figures from
That means the interest rates and monthly payments will
adjust -- in most cases, downward, because of interest rate
declines. Homeowners will have to decide whether to keep their
loans or replace them with a refinance.
In a few cases, the adjustment of interest-only loans will
make the monthly payments go up, even if their interest rates
go down. And some homeowners may not be able to refinance,
because their homes have dropped in value and they don't have
enough equity to qualify for a new loan.
Anyone sitting on one of these loans now must weigh the
options with the idea that today's low rates are unlikely to
last for the life of the loans, which will now begin to reset
annually. Here are some considerations.
-- Thank Ben Bernanke. The Federal Reserve chairman's
accommodative monetary policy has held the short-term rates
upon which adjustable loans are based very, very low. That
means that someone who originally took out an average 6.35
percent mortgage five years ago will see their rate adjust to
the neighborhood of 3 percent, reports Keith Gumbinger of HSH
Associates, a research firm.
On a $300,000 loan, their principal and interest payment
would drop from the $1,867 they had been paying to $1,329, says
Gumbinger. And who couldn't use an extra $500 or so a month?
-- That doesn't mean you should sit on it. Having that
lower payment for a year is dandy, but 25 years (the time
remaining on these loans) is a very long time, and rates are
likely to rise from their current low levels. Should they blow
through the roof, you could end up paying 5 percent next year,
7 percent the year after that, and so on. The maximum level for
most variable rate loans made at 6.35 percent is 11.35 percent.
Think that can't happen? They were there in 1985, on the way
down from 12.2 percent.
-- You have choices. If you think you're going to be in
your home for five years or less, keeping your loan might be
the best bet. If you want to stay there a long time, this might
be the time to lock in a 30-year rate. At around 4.6 percent,
"rates are about the best they've been all year," says mortgage
industry consultant Rob Chrisman. Furthermore, this might be
your last chance to grab a 30-year, fixed-rate loan, suggests
Gumbinger. He's speculating that they could go away altogether
or become much more expensive once Washington reforms
mortgage-buying giants Fannie Mae and Freddie Mac.
One other option is to refinance your current variable rate
loan with a new variable rate loan. That may seem strange, but
if you could lock in five years at 3.44 percent (the current
going rate on 5/1 ARMs, according to HSH), that might be worth
the refi costs. Finally, note that 15-year loans are now
running 3.8 percent, says Bankrate. You could take those
monthly savings and put them towards the bigger payments that
would come with a shorter maturity loan.
-- You'll have to do the math. Compare your options with an
online calculator, like the one on Bankrate.com
-- Call your bank, if you don't qualify for any of those
new deals. You may not be able to refinance because you're
underwater on the loan, meaning you owe more on the home than
it is worth. Or you may have suffered a financial setback and
stopped making mortgage payments. Roughly one-third of the
resetting mortgages are delinquent, says Credit Suisse. It's
possible the downward reset could make your payment more
affordable, and you could catch up. Or that the new low rates
will make your lender a little more willing to modify your
loan. At the new 3 percent rate, they'll be giving up a lot
less interest than they would have if your rate was still 6
(The Personal Finance column appears weekly. Linda Stern
can be reached at linda.stern(at)thomsonreuters.com)
(Editing by Gunna Dickson)