LIBOR ARM / Fixed Rate and trends ahead.

sgip

sgip

Well-known member
So this week all the shouting was about how "the Fed will increase rates" and how "the Fed won't raise rates". Meh.. Who knows what the Fed will do and so much blood and treasure has been spilled over the subject so far that it's getting pretty dull to re-hash ad nauseum.

What is getting interesting to me are the increasing LIBOR rates. With 99.999% of ARM loans tied to LIBOR, you'd expect to hear quite a bit about it by now. Here's a link to a monthly chart for all LIBOR loan rates over time. Be sure to highlight the last 3 years and drill down to what's going on:

http://www.macrotrends.net/1433/historical-libor-rates-chart

If the chart doesn't pull, here's an handy dandy example of why this trend will be newsworthy soon (IMHO)

July 2014 6 month LIBOR - 0.40 + 2.25 Margin = 2.65 effective rate. (yawn)

July 2015 6 month LIBOR  - 0.49 + 2.25 Margin = 2.74 effective rate (meh)

July 2016 6 month LIBOR  - 1.09 + 2.25 Margin = 3.34 effective rate (huh?)

The trend isn't friendly. Remember, LIBOR isn't a Fed controlled rate and something is up. For most borrowers who took out 5/1 ARMs in 2012-2013, may I suggest it may be time to avoid a 2017/2018 reset if present trends continue? For purchase loan seekers, it will be important to know that some very low ARM rates are not qualifying you at the start rate, but at index plus margin or more. That qualifying issue could magnify in 2017 if LIBOR does not reverse.

An FYI from SGIP.
 
We just locked in a rate on a Jumbo cause the loan officer was worried that rates might jump on us.  If we pay the down payment down some more we can get the lower rate, I'm not sure if it's worth the opportunity cost.  Any thoughts?

Also, isn't the LIBOR sort of...scandalous?  They did have the whole rate fixing thing a while back, I never thought that got enough headlines.
 
Having been tracking 1 month libor as we refinanced student loans with SoFi. Also on the uptick. Still better than paying the fixed 6.X% we had prior but trend is concerning.
 
I wonder what percentage of ARM borrowers know the index to which their adjusted rate is tied, much less the margin, initial max increase, annual max increase, and lifetime cap rate?

Fortunately, only ~5% of mortgages originated in 2016 are ARMs.
 
Perspective said:
I wonder what percentage of ARM borrowers know the index to which their adjusted rate is tied, much less the margin, initial max increase, annual max increase, and lifetime cap rate?

Fortunately, only ~5% of mortgages originated in 2016 are ARMs.
Click to expand...

Not to offend anyone with ARM, but many are blind-sided with the lower rates. Sometimes by as much as 150 basis point lower compare to fixed rates. This create an attractive low payments initially. But be very careful and understand thoroughly what Perspective post above. Knowing is EVERYTHING.
 
The 1-year LIBOR is current up to around 1.50% now.  That being said, you can refi out of an ARM loan into another ARM loan or a fixed rate loan.  If you ARM loan reset today you are looking at a rate of 3.75% yet you can refi into a 7 ARM at 2.75%.  ARM loans aren't for everyone, but those that use them properly will benefit at the end of the day.
 
I hope to be our of my home within the 7 years my ARM expires.  Good news is that the breakeven period is 12yrs compared to a 30yr fixed.
 
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