I’ve heard lots of bashing of the adjustable rate mortgage (ARM) and honestly, I do get it… mostly. Except I feel like we got the best rate ever — in 2004, we got a 5/1 ARM at 3.875%. Now that’s a mighty sweet rate! I was totally freaked last year though, when the five-year fixed rate was coming to an end… what next? What would it be? Should we refinance? Could we refinance?
I’ve mentioned before that we’ve put a lot into our house. It’s the source of a good amount of our debt… our mortgage is only 17% of our gross monthly income, and 23.2% of our net. If you add in our home equity loans it’s more like 24.7% of gross and 33.5% of net. I guess the rule of thumb is not more than 28% of gross. So, shockingly I think we’re better off there than we should be. In *my* opinion our debt is insane.
Anyway. The time is approaching for our next adjustment (last year we got the letter with the new rate on March 25, and the rate went down! I was shocked, it actually went to 3.5%). So, today I was trying to figure out how they got the rate last time and what it might be this time.
Basically, ARMs are tied to an index, and you have to read your loan documents to figure out which index it is. According to mine, “The ‘Index’ is the weekly average yield on United States Treasury securities adjusted to a constant maturity of 1 year, as made available by the Federal Reserve Board.” Then they add 2.75% to the current index. (It’s the index 45 days before the rate change (5/1/10), I think that’s 3/17/10.) I googled that, and I think I found it at http://www.federalreserve.gov/Releases/H15/Update/. I think it’s the treasury constant maturities 1-year. I selected Business day — sounds like it’s the average? Or maybe it’s the weekly? Last year the weekly for 3/13 was .70, and that’s what they used in the letter last year… 2.75+.7=3.45, not 3.5 . It says they round up to the nearest 1/8 of one percentage point (0.125%).
This year the weekly for 3/12 is .39, so .39+2.75=3.14 — I have no idea how they’re planning on rounding that. I may have to ask. If only I could fix 3.14% we’d save $5,485 over the life of the loan (that’s in my version, not the 24 years remaining on the loan). Of course I can’t fix this rate. My credit union is nice, but not that nice! But I have to say, getting an ARM seems to have been a reasonable decision for us. An ARM at 3.875 means that our rate can’t go up (or down) more than 2% per year, or more than 5% ever, so it could never go higher than 8.875%, and as I’m searching for the national average contract mortgage rate (1963-2009) it looks like it started pretty low in 1963, at about 6%, peaked in the early 80s near 15%, and is down to about 5% right now. Overall, our max rate looks to me to be under the curve, so I’m not going to worry (for now) about refinancing and all the costs that brings. (Plus the stress of worry whether we’d qualify — this housing market is awful.)
It will be fun to get the letter and see if I’m right!