Should I Refinance My ARM?

I received a call Friday January 25th, 2008 from a freelance reporter in Los Angeles named Marcie Geffner who was doing a story for a well known bank website called BankRate. She wanted to interview me to get my opinion on whether those with adjustable rates should take advantage of the lower fixed rates and refinance.

You can see the whole Bank Rate article here.

This interview led me to some important points that I want to make. It’s not a marketing secret that scaring the crap out of consumers is a pretty useful sales tactic. People buy on emotion and make emotional decisions and the news media and advertisers sell products that way.

I have been pounding the table since May 2007 that the Federal Reserve would start to lower rates in the fall of 2007; you can see my Blog post. So this big whoop la comes as no surprise.

What needs to be understood is that mortgages just like any investment should be managed. Just like investments, different loan products “perform” better during certain periods and working with a Certified Mortgage Planner allows customers to take advantage of changes in market sentiment and conditions and save $10’s of thousands of dollars.

Managing a mortgage is not about getting the lowest interest rate. It’s about matching the mortgage to the client’s financial goals. When you match the mortgage to their financial goals rates do not matter. The loan program that you have is meeting a certain financial need of the borrower.

This is part of wealth creation I explain to clients. In this business I have meet many people who have achieved great wealth by aligning their mortgage (s) to their financial need. I have never met one that achieved great wealth because they received the lowest mortgage rate.

It’s my job as a Certified Mortgage Professional to help borrowers make smart choices in selecting or maintaining a home loan. So to answer her question, should a homeowner with an adjustable rate refinance to a fixed rate? In a broad and general sense, absolutely not! Many people are going to be enticed to refinance into long term fixed rates. If the only reason someone is refinancing is to secure a “lower rate”, then save your money.

Let’s take a look at just two popular adjustable loan programs and important points.

MTA Indexed Loans, Also Called Option Arms
The MTA Index is a lagging index, meaning it takes a snapshot of the last 12 months of the CMT or Constant Maturity Treasury. Right now the MTA index is at 4.522% down from 5.0142% in February 2007. More importantly, at the time of writing, the CMT, is at 2.19%. So over the next 12 months those with MTA loans could have a rate based on 2.19%, a full 2.33% lower than the current 4.522%.

1- Month LIBOR Indexed Loans
The U.S. denominated 1MO LIBOR (London Interbank Offered Rate) loan is another popular index for an adjustable loan. That index, at the time of writing, is currently trading at 3.285% down from 5.3% last January, over 2% less.

**Every index is different and will not perform the same. There are no fewer than TEN different indices for adjustable loans. So if you have any questions regarding your specific situation and how the current rate environment affects your loan please give us a call.

So it would not be in the best interest of anyone refinancing just for rate. If you were refinancing for a life goal or financial goal i.e. college, separation of equity, or retirement planning, then that’s a whole different topic. There is so much money wasted with consumers refinancing just to reduce their rate and 80% of the time they are ADDING years to their mortgage. So what is the real savings? Do you add 3, 5 or more years to save a couple hundred dollars? No advice, bad advice and D.I.Y.’s loose 10’s of thousands maybe even hundreds of thousands. It’s really a shame some consumers do not spend more time investigating mortgage professionals based on advice.

Alan Greenspan has taken a lot if criticism recently for a statement he made recommending homeowners back in 2004, that they should have adjustable rate mortgages. Greenspan stated “the certainty of fixed-rate mortgages may not be worth cost. In a rare evaluation of the interest rate options that households face, he questioned whether American homeowners are well-served by popular fixed-rate mortgages.”

His point can be best explained this way. I have a chart that I show most all my clients. This chart shows the last 210 years, yes 210 years, back to 1790, of Treasury Bonds and what this chart shows is that for 185 of the last 210 years, mortgage rates have been below 7.5%. I can not publish the chart here for copy write reasons but will show a chart from 1977 till April of 2007. If you want to see the 210 year chart just call our office at 804.282.8808 and leave a message on ext 203 and we will mail, first class, a copy.

If you look at this chart of interest rates since the Reaganomics era, rates are on a decisive and consistent downtrend. After a high of 18.25% in January 1982, they went all the way down to the 7% range by the year 1990. Interest rates consolidated in the 7%-8% range till the year 2000. Between the years, 2000 - 2005 they resumed the downtrend to a low of 4.5% - 5%. From 2005 – 2007 they went up to 6.5% and again in 2008 resuming the down trend again.

We were refinancing loans at 4.5% and borrowers telling us rates will never be this low again. How misinformed!

So at what point between the Reagan era and today would a consumer have been best served in a 30 year fixed rate loan? Never. You would ALWAYS have been better in an adjustable rate loan, for the last 25 years. Even if you had an adjustable during the Reagan years and paying 14% -16%, rates are relative. Whatever mortgage rate you pay, is pretty easy to receive in other interest bearing accounts, meaning you were receiving 14% - 16% in pretty conservative savings accounts, certificates of deposit etc. Look how easy it is to get a 5% guaranteed rate today.

You have to understand The Why behind the high rates of the 1980’s. Once you understand The Why, it can be said with pretty good certainty that we will not see double digit interest rates again. Our economy, monetary policy and foreign policy are vastly different than back in the Carter – Reagan years.

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