It's a new year, and I have been off work so long (5 days) that I forgot my password to my email account. I know that probably tells me something, however, I am not sure I want to know what it indicates. We start the year with one significant problem brewing in the mortgage arena: short term arms are beginning to go from fixed to variable rates. Many people took short term arms in 2003 and 2004 that were at historical lows. I put out a number of loans to people in 2004 that had interest rates of 3.375% on a three year arm with loan amounts up to $1 million, and 3.875% on a five year arm with the same parameters. This year the three year arms are going to become variables and unless short term interest rates come down (we need the Federal Reserve to start cutting their rates), the variables will be significantly higher in rate and payment. What should be done?
First and foremost, we need to consider the low arms of the past a gift from the gods and realize that we may never see them that low again. Next, be aware that long term fixed rates have come down to rather interesting places (especially the 10 year fixed and the 15 year fixed). These loans are in the middle to high 5% range. They are still significantly higher than your old three or five year arm, but they are well priced as fixed rates. They are worth consideration because of both the interest rate and the shorter term to maturity.
Please note: If you have a five year arm, you should continue paying it off as fast as possible and do not concern yourself with the fact that it will become a variable in two more years. Do not give up this amazing rate because you are worried about what might occur in the next couple of years.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.