When an ARM adjusts…

[(former)FormerSanDiegan]

HLS –

I respect your opinion, and appreciate the perspective and honesty that you bring to the board

But, based on the facts posted and the assumptions enumerated below I still think it would be a keeper loan for me.

Granted I have not seen that additional terms such as index, margin and caps stated, and if these differ significantly from my assumptions I could change my mind. So, there are several big IFs here.

(Note: Never take out an ARM if you don;t know your caps, margin, and index and all terms of the loan such as pre-payment penalties, etc).

Here’s why I think it’s a keeper:

1. She said it will likely re-set to about 6%. I assume that the first adjustment to ~ 6% reflects an the fully indexed rate (e.g. LIBOR at ~ 5,2 + 1% margin or some other combination) First adjustments are typically capped at the max rate increase (e.g. 5%, but don;t know in this case).

2. If her 5/1 ARM was originally at 4.125% it is very likely that the maximum rate was set at 4.125+5 % or 9.125%, based on similar terms to 5/1 ARMS I investigated in the 2002-2003 time frame.

So, if I could turn back time and grab this loan (as I understand/interpret it), I would. In a heartbeat.

Reasons: The fully indexed rate is currently less than most 30-year fixed rates. And this is at a time when the yield curve is flat or slightly inverted. The spread is likely to be much greater if inflation increases.

The maximum rate may only by 9.125%. That’s a hefty increase from her original rate, but pretty good insurance if inflation rages in the future.

Again, if one has sufficient reserves my opinion is that this loan could be a keeper.

(Point may be mute, since the property is kinda sold in a rent-to-own way.)

P.S. – Post edited for typos and clarity.

[kaycee]

That was basically my thoughts as well, FSD. If I refi now, I will automatically go into a higher rate than what I am guaranteed to have for at least the next two years.

But I did pull up and ck my note. (I promise that I knew my terms well at the time, they just got fuzzy over the years)

My Index is indeed the LIBOR. My rate is the LIBOR +2.25. My one year cap is 2% and and my maximum is 9.125.

I could not close escrow for two years. So maximum I guess I could get to is 8.625. But wouldn’t that be close to what I would have to refi into since I would be paying non-owner occupied rates?

My P&I at the highest end would be I figure about $2600. Obviously a lot more than I started out at but not beyond my ability to pay.

[kaycee]

That was basically my thoughts as well, FSD. If I refi now, I will automatically go into a higher rate than what I am guaranteed to have for at least the next two years.

But I did pull up and ck my note. (I promise that I knew my terms well at the time, they just got fuzzy over the years)

My Index is indeed the LIBOR. My rate is the LIBOR +2.25. My one year cap is 2% and and my maximum is 9.125.

I could not close escrow for two years. So maximum I guess I could get to is 8.625. But wouldn’t that be close to what I would have to refi into since I would be paying non-owner occupied rates?

My P&I at the highest end would be I figure about $2600. Obviously a lot more than I started out at but not beyond my ability to pay.

[(former)FormerSanDiegan]

kaycee –

The 1-year LIBOR rate is currently 5.26% (6-month LIBOR is 5.33), so your fully indexed rate would be something like 7.55% today. Not a great deal, but with the low maximum of 9.125, your upside interest rate risk is limited to only an additional ~1.6% increase in LIBOR.

Check to make sure that the initial cap is 2%. Sometimes the initial reset cap is higher than subsequent resets.

[(former)FormerSanDiegan]

kaycee –

The 1-year LIBOR rate is currently 5.26% (6-month LIBOR is 5.33), so your fully indexed rate would be something like 7.55% today. Not a great deal, but with the low maximum of 9.125, your upside interest rate risk is limited to only an additional ~1.6% increase in LIBOR.

Check to make sure that the initial cap is 2%. Sometimes the initial reset cap is higher than subsequent resets.

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