Swimming Against the Tide: Lower Mortgage Rates and ARM Refinancing

By Richard Barrington
LoanPage.com Columnist

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Of the many stresses on mortgage borrowers, one frequently-cited problem was that a rise in mortgage rates caused many adjustable rate mortgages, or ARMs, to reset at higher levels. This meant higher monthly mortgage payments, a graphic illustration of the risk of this kind of mortgage.

Some borrowers scurried to refinance their ARMs, only to find that this would mean locking into higher rates with a fixed rate mortgage. More recently, the direction of mortgage rates has reversed, and it may signal a better time to refinance from an adjustable to a fixed rate mortgage.

Reversing the Current: Mortgage Rates Turn Lower

30-year mortgage rates hit a 35-year low in June of 2003, at 5.23%. They've bounced around since then, but overall the trend has been higher, with mortgage rates topping 6.7% in each of the last two summers.

However, since this past July there has been a steady move downward, with mortgage rates easing to 6.31% by mid-September.

Why Refinance?

For holders of ARMs, the rise in mortgage rates triggered a natural desire to escape the uncertainty of a fluctuating mortgage. Under those conditions, the desire to refinance was understandable, but the benefits of doing so were limited.

In contrast, with mortgage rates now falling, the temptation might be to leave it to the ARM to automatically adjust down to lower rates. However, there are two good reasons to refinance to a fixed rate mortgage in a falling rate environment. First, you might be able to get the jump on your ARM's reset date, and thus start paying lower rates sooner. Second, having seen the uncertainty inherent in holding an ARM, you may choose to lock in payments once mortgage rates reach an affordable level.

Freddie Mac

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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