Western Pacific Home Loans

Adjustable Rate Mortgage Holders Prepare for Increase in Interest Rates

Short-Term Interest Rates on the Rise


Costa Mesa, CA -- (ReleaseWire) -- 09/25/2006 --Interest rates have been on the rise and many homeowners who have adjustable rate mortgages may soon see increases in their annual rate adjustments.

Concern is growing in Washington and among many mortgage lenders regarding whether consumers with Adjustable Rate Mortgages will be able to handle the payment increase they’ll experience when their loan resets to the new minimum payment required. CNBC reported last week that over $1 TRILLION in mortgages are scheduled for adjustment in 2007 alone.

Federal Reserve Chairman Alan Greenspan made it clear in 2004 that the Federal Reserve would be increasing short-term interest rates at a “measured pace.” With the US Dollar at its weakest point in seven years, oil prices unstable and the evaluation of other economic indicators, the Fed Funds Rate was hiked seventeen consecutive times from 1.0% to 5.25% from June 2003 to June 2006 in an effort to curb inflation. On September 20, 2006 the Federal Open Markets Committee voted once again to keep the rate at 5.25%, even though they state that some inflation risks remain.

Consumers with revolving debt accounts tied to the prime rate have seen the effect through rising interest rate charges, as the prime rate always rides 3% above the current Fed Funds Rate.

Mortgage interest rates are affected indirectly by these changes. An increase in the Fed Funds Rate has an impact on financial markets as a whole, but mortgage rates may go up or down based on the perception investors have of current economic statistics and their reaction to the Federal Reserve’s after-meeting statements.

In general, when economic data indicates we have a slow-down occurring in our economy, investors tend to sell off stocks and reallocate that money to the safe haven of bonds and mortgage-backed securities. The purchase of mortgage-backed securities drives interest rates down. When economic data says there is growth in the economy, the stock market typically rallies and mortgage-backed securities sell off to fuel that stock market rally. This drives mortgage interest rates up.

Our current market reflects the reaction of investors reading between the lines on comments made by the Fed, and mortgage interest rates have been going up. This will have an affect on homeowners with adjustable rate mortgages (ARMs) tied to indexes that are based on short-term interest rates. This includes the 11th District Cost of Funds, 12-Month Treasury Average (MTA), London Inter Bank Offering Rates (LIBOR) and others.

This doesn’t mean that everyone with an adjustable mortgage is in trouble right away. Some indexes are more volatile than others. COFI moves much slower than other adjustable rate indexes, while the LIBOR fluctuates with more volatility. But remember, when an ARM adjusts, the new interest rate is a sum of the borrower’s fixed margin plus the current rate of the index the mortgage is tied to.

If you have an Adjustable Rate Mortgage that is scheduled to reset in the next 12 months, you could see your minimum payment increase anywhere from 50% to over 100%. If you have a Home Equity Line of Credit (HELOC), the interest rate has increased 4.25% in the last two years, more than doubling the required payment for some homeowners. If you have an Option Arm, you could see your interest rate increase to over 8.0%.

Consumers who foresee paying an interest rate that is significantly higher may want to consider refinancing to take advantage of the stability and current low interest rates of a fixed rate mortgage. The fixed rate mortgage interest rates are the lowest they have been in six months.

This is also a good time for borrowers who started out in an adjustable rate loan due to a poor credit score to transition into a fixed rate loan if they can. Once a track record of making mortgage payments on time and in full has been established, this should have a positive effect on the credit score and there’s a good chance the borrower may now qualify for a loan with a lower interest rate.

As with any decision to refinance, it is important to take the terms of the existing loan, the cost of the new loan, and the borrower’s long-term needs into consideration. A qualified mortgage professional should help weigh out the options by providing a clear assessment of available loan programs for the consumer. To find a qualified ethical mortgage professional, contact the National Association of Responsible Loan Officers (www.narlo.com), or Certified Mortgage Planning Specialists Institute (www.cmpsinstitute.org).