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Dear Mr. Feichthaler,
In prior columns you had mentioned that interest rates wouldn't stay at 3% forever, and that if my rate was higher, I should refinance. Well, I waited, and now I see the average 30-year mortgage is at 5.4%! However, I have been offered a 4% rate, which is still better than what I have by a local company, but is says "ARM" next to it. Any reason not to proceed?
-- Christina B.
Dear Christina,
As someone who remembers his first CD funded with paper route money paying 18%, interest rates still are low from my perspective. However, when you consider that interest rates, and therefore annual interest payments that have resulted, is over 60% higher than 6 months ago, that is an enormous jump in a short period of time. The typical $300,000 loan for which I handle title and closings would have cost around $9,000 in interest per year. Now, it's over $15,000 a year for the same loan. I have discussed the pros and cons of refinancing previously, but you will want to compare the rates to what you have now, and consider the costs in obtaining the refinancing.
Turning to your specific question, ARM stands for Adjustable Rate Mortgage. Back in 2005, the majority of lenders I worked with were offering these, and buyers were happy to go forward with them. The reason is simple -– adjustable rate mortgages are not fixed, and are based on the prime rate or other benchmark. So, if interest rates climbs in the future, the rate of the mortgage will increase in the future. This allows lenders to offer these rates at a lower amount than a standard 30-year fixed. Typically, adjustable rate mortgages are at the initial fixed rate, from two to five years, then changes based on the prime rate. You may recall the result in 2008 — our foreclosure crisis was caused, in part, by borrowers' interest rates being adjusted higher after the initial interest rate expired, causing some homeowners to be unable to make their payments.
An important question to be asked for any refinance, but especially an adjustable rate mortgage refinance, is how long you plan to remain in the property. For instance, if you know you are moving in with your family in Ohio in two years, then an adjustable rate mortgage may be fine, because you will sell and move prior to the fixed rate expiration. If you plan to remain for decades, a fixed rate is likely a better option. You can potentially refinance later if rates decline, while protecting yourself from escalating rates. Also, the length of the initial rate is key. Although it is typically 2-5 years, it could be shorter than that.
With today's inflationary and interest rate environment, I would not want to be in an adjustable rate mortgage that could go up soon. Finally, as always, inquire about the total costs of the refinancing.
Adjustable rate mortgages are not inherently bad, but do require additional analysis to make sure it is right for you and your situation.
Eric P. Feichthaler has lived in Cape Coral for over 35 years and graduated from Mariner High School in Cape Coral. After completing law school at Georgetown University in Washington, D.C., he returned to Southwest Florida to practice law and raise a family. He served as mayor of Cape Coral from 2005-2008, and continues his service to the community through the Cape Coral Caring Center, Cape Coral Museum of History, and Cape Coral Kiwanis. He has been married to his wife, Mary, for over 20 years, and they have four children together. He earned his board certification in Real Estate Law from the Florida Bar. He is AV Preeminent rated by Martindale-Hubbell for professional ethics and legal ability, and is a Supreme Court Certified Circuit Civil Mediator. He can be reached at eric@capecoralattorney.com, or 239-542-4733.
This article is general in nature and not intended as legal advice to anyone. Individuals should seek legal counsel before acting on any matter of legal rights and obligations.