So you have a variable rate loan - what happens when interest
rates rise? This article explains everything.
Short-Term Interest Rates on the Rise; Adjustable Rate
Mortgage Holders Prepare for Increase in Rate
By
Mical Johnson
Interest rates are on the rise and many home owners who have
adjustable rate mortgages may see increases in their forthcoming annual
adjustments.
Federal Reserve Chairman Alan Greenspan made it clear in 2004
that the Federal Reserve would be increasing short-term interest rates at a
“measured pace.” With the US Dollar at its weakest point in seven years, oil
prices unstable and the evaluation of other economic indicators, the Fed Funds
Rate was hiked seven times from 1.0% to 2.75% since June 2004 in an effort to
curb inflation. Some economists believe it won’t stop until the Fed Fund Rate
hits 4.0%.
Consumers with revolving debt accounts tied to the prime rate have seen the
effect through rising interest rate charges, as the prime rate always rides 3%
above the current Fed Funds Rate.
Mortgage interest rates are affected indirectly by these changes. An increase
in the Fed Funds Rate has an impact on financial markets as a whole, but
mortgage rates may go up or down based on the perception investors have of
current economic statistics and their reaction to the Federal Reserve’s
after-meeting statements.
In general, when economic data indicates we have a slow-down occurring in our
economy, investors tend to sell off stocks and reallocate that money to the safe
haven of bonds and mortgage-backed securities. The purchase of mortgage-backed
securities drives interest rates down. When economic data says there is growth
in the economy, the stock market typically rallies and mortgage-backed
securities sell off to fuel that stock market rally. This drives mortgage
interest rates up.
Our current market reflects the reaction of investors reading between the
lines on comments made by the Fed, and mortgage interest rates are going up.
This will have an affect on home owners with adjustable rate mortgages (ARMs)
tied to indexes that are based on short-term interest rates. This includes the
11th District Cost of Funds, 12-Month Treasury Average (MTA), London Inter Bank
Offering Rates (LIBOR) and others.
This doesn’t mean that everyone with an adjustable mortgage is in trouble
right away. Some indexes are more volatile than others. COFI moves much slower
than other adjustable rate indexes, while the LIBOR fluctuates with more
volatility. But remember, when an ARM adjusts, the new interest rate is a sum of
the borrower’s fixed margin plus the current rate of the index the mortgage is
tied to.
Consumers who foresee paying an interest rate that is significantly higher
may want to consider refinancing to take advantage of the stability of a fixed
rate mortgage.
This is also a good time for borrowers who started out in an adjustable rate
loan due to a poor credit score to transition into a fixed rate loan if they
can. Once a track record of making mortgage payments on time and in full has
been established, this should have a positive effect on the credit score and
there’s a good chance the borrower may now qualify for a loan with a lower
interest rate.
As with any decision to refinance, it is important to take the terms of the
existing loan, the cost of the new loan, and the borrower’s long-term needs into
consideration. A qualified mortgage professional should help weigh out the
options by providing a clear assessment of available loan programs for the
consumer.
Mical Johnson is affiliated with Rock Financial, Inc., a Licensed
Correspondent Mortgage Lender, Florida Department of Finance. Free consultation
and a 10-Year History of ARM Indexes are available by calling. You my also
obtain a free copy of Mr. Johnson’s Home Buyer Handbook by contacting him at
http://www.TampaMortgageGuy.com. He is also a contributing author at
http://www.Debt-Free-Personal-Finance.com
Article Source: http://EzineArticles.com/
| 
Facts
Menu
