Florida Home Loan Rates Rise For ARMs Across the Board
In recent years, the popularity of Adjustable Rates Mortgages (ARM) has risen tremendously. This has especially been the case with Florida home loans of this nature. Nearly a third of all mortgage loans are currently in thie form. Now, it’s time for those consumers to pay up.
While there are several types of ARM, they all share one feature: After an initial period of fixed payments with low rates, the loans adjust — usually to the prevailing yield of one-year Treasury bills plus a margin of one to three percentage points.
For example, a borrower with a 3/1 ARM pays at the initial interest rate for three years and the loan adjusts once a year after that. A one-year ARM, which has a lower initial rate, adjusts after one year and a 5/1 adjusts after five. There are also 7/1 and 10/1 ARMs. Individuals who took out a 3/1 ARM in late 2002 or early 2003 will soon get socked with big increases in their monthly mortgage payments.
The Mortgage Bankers Association estimates that some $330 billion worth of ARM will adjust in 2006 and $1 trillion worth will reset by the end of 2007.
According to Freddie Mac, the average ARM loan is about $300,000. Therefore, a trillion dollars probably represents more than three million homeowners who will face bigger bills in the next two years. If you took out an 3/1 ARM for $300,000 back in late 2002, your initial interest rate was probably around 5% and your monthly payment has been about $1,610.
Keith Gumbinger, vice president at HSH Associates, a publisher of consumer loan information, says 3/1 ARM coming due today would readjust to a rate of 7.1%, a jump of more than 2 percentage points. (Most 3/1 ARMs, however, have 2 percentage point caps; they can’t be raised more than that until they readjust after another year). The new payment would look like this: $1,995 a month — a difference of $385, or more than $4,600 a year.
One-year ARM holders, whose initial rates last year were just over 4%, will also see their payment increase a lot, but because of caps, they still won’t be paying as much as 3/1 ARM holders, at least until they reset again. Holders of 5/1 ARMs coming due later in 2006 and in early 2007 should not have to undergo increases as large. Their rates were higher to begin with - about 6.6%in early 2002 - being raised to 7.1%would only add about $100 to their monthly payments.
“Most borrowers have some financial cushion so the impact won’t be immediate; spending an extra $380 is manageable at first,” said Gumbinger. “But it’s safe to say there are some who will find themselves in budgetary difficulties a year or two down the road.”
Refinance into a fixed rate
How are consumers reacting to this news? What should you do if you have an adjustable rate Florida home loans? Many ARMs holders are transferring their debt into fixed-rate mortgages, according to Bob Moulton, founder of Americana Mortgage Group on Long Island. This will shield them from further rate increases, but it does entail a bit of sticker shot as well.
A 30-year fixed rate at 6.43%, for instance, will still add about $260 a month to the borrower who had a 3/1 ARM. And the individual in question will either have to pay about $3,000 to $5,000 in closing costs out of pocket or add that sum to the mortgage principal, sending monthly bills higher.
Think about your options. Initially, ARM borrowers received the benefits of low payments, but now they’re going to be seeing an increase in interest over the next year or so. This could lead to added pain for an already shaky real estate market.
