Interest Rates on ARM Mortgages Are Adjusting… Lower???
Author: Nick
Category: Money
Topics: lending, real estate
In its continuing efforts to convince me to move to Canada, the U.S. economy has decided to further “reward” my decision to avoid risky adjustable-rate mortgages (ARMs) by throwing me this infuriating bit of news: some ARM rates are adjusting down.
Yes, some people are still getting priced out of their homes by their resetting mortgage rates that cause their monthly payments to skyrocket by hundreds or even thousands of dollars, but some lucky fools are now paying less today than they were two or three years ago. How can this be? Well, it all depends on what benchmark a mortgage lender follows when initially setting and later adjusting an ARM’s rate.
For example, consider the case of some bank that, for the sake of protecting the stupid, we’ll simply refer to as XYZ Bank. XYZ Bank has offered numerous adjustable-rate home mortgage loans dating back to 2003. Its most common product is the 5-year ARM—borrowers pay at a fixed interest rate for the first five years, after which the rate adjusts annually but no more than 1% at a time. XYZ Bank also offers 3-year and 1-year ARMs which, as you can surmise from their names, offer fixed rates only for the first three years or one year, respectively. At the time the mortgage loan is issued, and then annually after the fixed-rate period ends, XYZ Bank sets the mortgage’s interest rate based on the 1-year LIBOR rate. (In case you don’t know what the LIBOR is, it’s just an imaginary number established by magical banking elves from the mythical land of England.) The interest rate isn’t exactly the LIBOR rate; XYZ Bank tacks on a few extra percent for profit. The important thing to understand is that XYZ Bank’s ARM rates follow the 1-year LIBOR up or down.
Here comes the fun part. Customer A got a 5-year ARM through XYZ Bank back in March of 2003 when the 1-year LIBOR rate was just 1.34%. Customer B got a 3-year ARM through XYZ Bank in March of 2005 when the 1-year LIBOR rate was 3.84%. As a result, Customer B’s initial fixed rate was likely a couple percent higher than Customer A’s. Fast forward to March of 2008 when both Customer A and B’s fixed-rate periods end and their interest rates adjust by as much as 1% annually based on where the 1-year LIBOR rate is now. In March 2008, the 1-year LIBOR rate was 2.709%. That’s more than one percent higher than Customer A’s initial LIBOR rate and more than one percent lower than Customer B’s initial LIBOR rate.
So what happens? To make a long story short, XYZ Bank adjusts Customer A’s rate up by as much as 1% and lowers Customer B’s rate as much as 1%. As a result, Customer A’s monthly mortgage payment skyrockets $500 a month; he can’t afford it, and nobody will buy the house for anywhere near what he paid for it in 2003, so the bank forecloses by the end of Summer 2008. Customer B ends up saving $400 a month and buys Customer A’s house at a foreclosure auction for half of what Customer A paid for it in 2003. Customer A finds out and sleeps with Customer B’s really hot wife for revenge. Customer B and Mrs. Customer B end up getting divorced; she takes Customer A’s original house in the divorce agreement and moves in with her man-mistress (Customer A). Then the LIBOR rate jumps 5% and everyone loses their homes anyway. The end.
And just to prove I’m not making all of this up, here’s a link to a story over at FatWallet.com of a guy whose 3-year ARM just made its first adjustment—down 1% from the initial rate.
As for me, I still have my lovely 6% fixed-forever loan that seems like a really bad idea today but I’ll probably be happy I took in a few years once those ARM rates start shooting up through the stratosphere. Unless, of course, the imaginary English elves have anything to say about it.
Loading ...
45 Responses »
1.
frank
April 15th, 2008 at 1:33 pm
Nick,
Warning, the following is very nitpicky.
Not all ARM loans were made to subprime borrowers and by extension, not ARM loans are risky.
My current mortgage is a prime 5-year ARM with a rate below 5%. My ARM is indexed off the 12 month CMT with a margin of 275 bps. So if the CMT is at 1%, my mortgage rate when it resets will be 3.75% (it starts in 2.5 years). Moreover, I will reset on a yearly basis.
A subprime ARM mortgage starts off at more like 7.5-8.5% and is indexed off LIBOR (as you mentioned before). However, their margin is more like 6%. So with LIBOR at 2.709 that means that reset at 8.709% which may be higher or lower depending, as you said, on when they received their mortgage. However, they will most likely reset exevy six months. So depending on what LIBOR does in 6 months, those borrowers will be faced with a new payment (higher or lower).
Notice that your 6% fixed rate is STILL lower than a subprime borrower who took out an ARM loan even though they might be resetting lower now.
Now, if my mortgage was resetting today then yes, I would be getting a slightly lower interest rate than now. My wife and I were comfortable taking on that risk and we were very much aware that our mortgage could be higher or lower. We did it in a relatively responsible manner.
That’s my nitpick.
2.
Nick
April 15th, 2008 at 6:48 pm
Thanks for the nitpick, Frank. And you’re absolutely right about ARMs not always being risky. Plenty of people could afford theirs even if they adjusted up 1% every year until they hit their caps.
That said, I do know a few people who will suddenly join us at restaurants and other outings a lot less frequently in the future if their rates really did start going up 1% a year for the next five years.
3.
Kyle
April 16th, 2008 at 10:01 am
I got a 30 year fixed 1st and a 5 year ARM 2nd, but I’ll have the 2nd paid off in full before the rate resets. Sure I could have just put 20% down to begin with but I like to live dangerously.
4.
Obbop
April 16th, 2008 at 10:06 pm
Silly me, what with is obviously a disgusting un-American anti-capitalist morality.
For items needed for basic survival: food, shelter, medical care (not ALL types of medical care… the life-saving type) etc. I bemoan the profit-motive being involved.. to an extent.
Yes, money is used to assist in allocating scarce resources….. and with so many humans infesting the planet all resources are scarce to some extent, more-so for some, not-as-much for others.
I do not propose that all home buyers have access to mini-mansions.
I just wish that profit from the “basics” was limited.
Sure, those building the house, those providing the materials…on and on… deserve to earn the fruit of their labors.
Perhaps it is the interest on loans that multiplies the price of shelter many times the actual cost that bothers me.
If the atmosphere could be metered and taxed I truly believe there are those who could do that if possible and if people died due to inadequate funds, the Rush Limbaughs of the world would rationalize how the dead were at fault.
I can envision a USA where the working poor could actually afford a basic house… nothing too big or fancy but providing the shelter that survival requires.
Wishful thinking, I know, but I tire of a small minority, an elite class, living so very very well by skimming off the profits of the labors of so many people.
If I had a BIG foot I would stomp upon the socio-economic pyramid and condense it a little. Not a lot. I believe in reward for personal initiative but as a former worker alongside the migrant agricultural workers, many who eked out a living in abject poverty but whose hard labors allowed the elites to live their lofty life style (as well as every other American who ate store-bought food) I believe that morality and reward for honest work required by a country/society to even exist should be adjusted just enough so the entire “team” is rewarded.
Currently, too many parasites are skimming off the wealth.
Sometimes, I wish the agricultural workers and truck drivers would just go on strike for a year.
Then the elites would understand how vital the commoners, the working poor are to keep the country going.
But, the elites have enacted immense bureaucracies and propaganda machines to maintain the status quo that benefits them so very well.
I believe that any group, workers or otherwise, who truly threatened the elite’s status quo, could be subject to terrible punishment, up to and including death via the jack-booted thugs.
Sigh…………….
Sometimes I just want to abandon the creeping meatball but nature will take care of that in time. And with 5 decades under the belt that time is not that far away.
I still can see in my mind those 8-year-old kids and old ladies laboring in the fields, under a sweltering sun, not earning any overtime pay until more than 60 hours were worked in one week… then I hear the apologists, the Rush Limbaugh-type folks heaping ridicule on those unworthy of the income the “better class” deserves and earns….
And my anger grows a wee bit more.
5.
Mortgage Advisors
September 4th, 2008 at 5:45 am
Wow I did not know that ARM resets would work like this, we dont have them in the UK At least customer A got the hot wife.
6.
private landlord properties
September 23rd, 2008 at 2:54 am
Great info! Thanks! The sketches are great as usual!
7.
Mark
October 20th, 2009 at 2:07 pm
My Loan just reset this month. It is a 5/6 month LIBOR ARM, with a 2.75% margin. The 6 month LIBOR at reset was 0.62875%. So 0.62875 + 2.75% = 3.37875% rounded to nearest 1/8 percentage point = 3.375%. My previous rate was 6.375%… so I just dropped 3 percent… and the best news is that now that it reset low, it can only be adjusted up by a maximum of 1% every 6 months, so even at the worst case, it will be a minimum of 1.5 years before I return to my previous rate. Of course, I have been paying extra on my Mortgage these past 5 years and will continue to make the same payment. In two years I plan to either sell (if the market recovers any) or refinance to a ~5-6% 15 year fixed rate loan because the remaining balance will be sufficiently low that the payment will be approximately the same (and I will end up paying off the balance in a total of 22 years for less overall cost than a 6.5% 30 year fixed would have been).
8.
discount gucci for sale
November 12th, 2010 at 3:26 am
nothing is impossible…
9.
برامج
November 26th, 2010 at 2:29 am
Inhumanity article intéressant
10.
افلام
November 26th, 2010 at 3:40 am
thème de Nice et a continué à écrire
11.
دردشة
November 29th, 2010 at 11:06 am
Le sujet de plus de merveilleux que vous le méritez
12.
Stephen
November 30th, 2010 at 5:56 pm
The comic is great on this one, well done. I cant believe that this happens in the USA, though in Australia we seem to be struggling with our mortgage and interest rates are not helping the situation.
13.
ブライトリング 偽物
December 3rd, 2010 at 3:03 am
The comic is great on this one, well done. I cant believe that this happens in the USA, though in Australia we seem to be struggling with our mortgage and interest rates are not helping the situation.
14.
Paul Stall
January 22nd, 2011 at 5:19 pm
thanks! another great sketch as usual!
15.
Discount LV Handbags
February 17th, 2011 at 9:44 am
good topic and nice wrting.
16.
cheap ralph lauren polos
February 17th, 2011 at 11:57 am
very cute painting ,are these for yourslfe?
17.
الملتقى العربي
February 21st, 2011 at 3:17 pm
Le sujet de plus de merveilleux que vous le méritez
alarabforum
18.
Johnny
March 7th, 2011 at 2:33 pm
back in 2005 i did a 5 year arm at 4.625%….it has reset twice now..3.75 and this year to 3.0%…not too bad..i will keep this for a few more years.lol
19.
zara
March 25th, 2011 at 9:57 pm
http://www.vibramfivefingershoes2011.com/
20.
haiying
April 12th, 2011 at 3:15 am
http://www.mylouisvuittonoutlet-sale.com/
21.
xx
April 27th, 2011 at 2:43 am
http://www.coachpursestores.com/
22.
zara
May 14th, 2011 at 3:16 am
http://www.burberrybags-store.com/
23.
Loans Australia
June 22nd, 2011 at 10:21 pm
I know people who will not join us at restaurants and other outings if their rates start going up.
24.
burberry outlet
July 9th, 2011 at 7:38 am
thank you for sharing,this information is useful to me.good quality
25.
jocu-RI cu Masini
August 2nd, 2011 at 11:04 am
Haha, how do you come up with this stories, they are very funny, keep it up!
26.
شات صوتي
August 2nd, 2011 at 7:33 pm
qe http://www.q8motor.com/
27.
jocu-RI cu Masini
August 16th, 2011 at 7:06 am
You are the funniest man alive dude, I realy like you
28.
الرياض
August 28th, 2011 at 11:41 pm
The comic is great on this one, well done. I cant believe that this happens in the USA, though in Australia we seem to be struggling with our mortgage and interest rates are not helping the situation.
29.
شات مصرى
September 15th, 2011 at 7:30 am
mcryh mcryh
30.
Property Marbella
November 4th, 2011 at 4:13 am
The comic is great on this one, well done. I cant believe that this happens in the USA, though in Australia we seem to be struggling with our mortgage and interest rates are not helping the situation. Property Marbella
31.
معهد
November 20th, 2011 at 6:19 pm
I have a presentation that I am presently working on – and I have been looking for such information.
التقويم الهجري 1433
32.
دردشة عراق الرومانسية
December 23rd, 2011 at 12:30 pm
thank you a lot’s bro
33.
replica jewelry
January 25th, 2012 at 11:02 pm
Nice hosting! It’s my first time to read like this article.hdtuhj
34.
شات
January 27th, 2012 at 7:14 pm
thanx this topic very very good
i will spend my time in this site
35.
Pain in Left Side
February 23rd, 2012 at 10:30 am
Looking forward more comics.
36.
Nothing
February 23rd, 2012 at 10:44 am
Nothing is impossible… The comic is great on this one, well done.
37.
Cheap WPC Powders New Zealand
March 28th, 2012 at 4:51 am
Hey, do you maybe accept guest posts here? I would love to write couple articles.
38.
coffee machine
March 28th, 2012 at 8:41 am
Super-Duper site! I am loving it!! Will come back again – taking you feeds also, Thanks
39.
cheap prom dress
April 10th, 2012 at 10:30 pm
This is very vital details about shareapoint stuff, many working professionals will be more than happy to avail these details. Thanks for sharing the information.
40.
شات حلا السعودية
April 17th, 2012 at 11:42 am
good man this topic very good
شات الحب goodث
41.
شات
April 27th, 2012 at 12:31 pm
Good The Chat ..
42.
منتديات
April 27th, 2012 at 12:32 pm
Good The Hammsa ..
43.
منتديات
April 27th, 2012 at 12:33 pm
Hammsa Goo So
44.
العاب 2013
May 9th, 2012 at 1:46 am
thanx this topic very very good
Leave a comment
Line and paragraph breaks automatic, e-mail address never displayed, HTML allowed:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>Trackbacks & Pingbacks
cash homebuyers reviews…
Grand Piece of work on the Website…
Trackback by Oneil — September 4, 2011 @ 3:05 am