RTC Mortgage Blog

Mortgage Update: 5/27/10

May 28th, 2010 7:33 AM by Richard T. Cirelli

What Is LIBOR and why is it Rising?

The LIBOR Index has been the most commonly used Index for Adjustable Rate Mortgages (ARM's). LIBOR stands for London Interbank Offered Rate.  It's the interest rate at which banks lend money to each other and LIBOR tends to rise and fall with the stability of the global banking system.  It is a very fast-moving Index and that's why banks like to tie their lending rates to this cost of funds index.

As the debt crisis spreads from Greece to Spain to the rest of Europe, the risk of lending amongst the banks gets larger. And so, LIBOR rises, too.

How does that Affect Existing ARM loans?

First of all, let's make sure we all understand how ARM rates are reset. An ARM loan is typically fixed for the first 3, 5, 7 or 10 years. After that initial fixed-rate period the loan converts to an Adjustable Rate that adjusts every 6 or 12 months. When it adjusts, the new rate is determined by adding the Index (such as LIBOR) to the Margin - typically 2.25%. So, if the Index is 1.250% when it's time for the rate to adjust, the new rate will be 1.25% + 2.25% or 4.50%. The margin never changes but the Index is always changing.

A New Mortgage Is Now As Cheap As An Adjusting One

The same dynamic that is causing adjusting mortgage rates to adjust higher is also causing new adjustable rate mortgage rates to drop. Homeowners that already have an ARM and have been enjoying the lowest rates in history can assume that when their loan is ready to adjust they will get the current rate of no more than one more year. But, they can opt for a new ARM at the same rate or better than to what rate their existing loan would adjust and it can be fixed for 5 more years.

Taking a new ARM looks like a complete no-brainer right now, so long as you can keep your closing costs to a minimum. If buying a new house, the ARM is a great choice if you don't anticipate staying in the property for a period that is longer than the initial fixed-rate period of 3, 5, 7 or 10 years.

What To Do About Your ARM

If your ARM is adjusting and you want to know if it's better to refinance or just let the adjustment happen, please contact me for a complete analysis so we can determine the total cost of keeping the existing loan or refinancing into a new one.

If you are buying, I will do a similar analysis to compare the ARM choices against today's low fixed rates. ARM rates are always lower than fixed rates to start with but they are likely to be higher than today's fixed rates when they reset. If you wait until your loan resets, fixed rates will be higher than they are now.

Whether buying or refinancing, it's important to make the right decision now.

Credit Score Average Rises to 750 at Fannie/Freddie

The average FICO score on single-family loans purchased by Fannie Mae and Freddie Mac now stands at 750-up from 715 on purchases during 2006 and 2007, the two years that account for most of the Agency's losses. Loans are still available with scores as low as 620 but remember that Fannie and Freddie created Price Adjustments that penalize the borrower for each 20 points that their score is below 700. That discourages the low-FICO borrower and can make the FHA loan a more attractive alternative. FHA does not penalize for low FICO scores.

Mortgage Rate Update:

Rates have drifted up a little this week after a nice improvement over the previous two weeks. As stocks spiraled lower following concerns about the global economy and the financial issues overseas, investors moved money into U.S. Treasuries and bonds, including Mortgage-Backed Securities as a safe-haven from the stock selling. That led to lower mortgage rates over the past two weeks. However, if those concerns continue to ease as they have showed this morning, we could be in for more increases to mortgage rates in the very near future. We'll have to see how it all plays out.

In the meantime, rates are still great and near all-time lows. And, JUMBO rates are the best they have ever been as lenders continue to gain confidence again about their ability to securitize and sell Jumbo loans that exceed the maximum loan limits of Fannie Mae and Freddie Mac.

Posted in:General
Posted by Richard T. Cirelli on May 28th, 2010 7:33 AM



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