or Make it Worse?
When you break your arm, do you go to your family doctor, or do you go see someone at the ER that is equipped to deal with it? If you are like me, you go to the ER and request a specialist on top of that to make sure your broken arm gets fixed correctly so you don’t have to re-break it just to fix it again. The reason is that your family doctor doesn’t even have the tools necessary to tell you whether or not your arm is even broken.
So if you think you have a broken ARM, why go see a general mortgage practitioner who can’t even tell you straight up whether or not your ARM is really broken? Many Americans have already done exactly that and fixed their ARM even when it wasn’t broken yet. If they had gone to see a mortgage specialist, they could have avoided wasting all that money and making a big mistake.
Just because the media, your neighbor, or even your dog tells you that you need to convert your ARM to a fixed rate or face foreclosure doesn’t mean they’re right. If you dig a little deeper into what is happening to your adjustable rate mortgage, you may just find that it isn’t broke. You may even find it is better than you thought. So, don’t let a general mortgage practitioner prescribe the wrong medicine.
Take a look at the chart below to see what I mean…
Since many ARMs are tied to LIBOR with a standard 2.25% margin, the black line is where your fully indexed rate would if you adjusted today. Interestingly enough, that black line has dropped below the light blue one which represents a 30-year fixed and guess what, it will likely keep going lower. Since the Fed won’t be happy until the Fed Funds Rate is back to about 1%, you can bet LIBOR ARMs are going to be a really good deal in the near future.
Since the media has bashed ARMs to death, you may find it surprising that over the timeframe of the graph, the LIBOR plus margin has been significantly lower than the 30-year rate for a while, yet didn’t exceed the 30-year rate by a large amount, and even then, for only short periods.
The bottom line is that if you had one of these common ARMs (LIBOR based with a normal margin, ie not subprime), you likely just wasted a lot of money. But take heart in knowing you fed the family of a starving mortgage broker. If you had gone to a mortgage specialist, you would have saved the money and likely been enjoying your rate drop.
Shailes Ghimire
February 5, 2008 at 9:20 pm
Robert,
That’s very good analysis. The graph shows that the Federal Fund rate and the 6-month LIBOR have a similar pattern over the past 13 years. Hence it appears safe to conclude that the trend should continue.
Therein lies the major concern. These are uncertain times and I don’t know if people have the stomach for the kind of up and down an ARM has in store. Look at the 30year line. It’s almost flat compared to the other two. I don’t know if the media is the one touting he switch, but I know plenty of borrowers right now who’ll say “damn the savings” give me the stability. In a climate of falling real estate prices (in most markets) I don’t blame folks wanting to hold on to a rate (considering how low the 30 year is in historical terms).
However, I do agree with your analysis. You have a valid point. I just don’t think rational thinking really trumps uncertainty at this point. That could be more of an explanation than anything else.
Robert D. Ashby
February 5, 2008 at 9:46 pm
But wouldn’t rational thinking justify my point? If you rationaize, you would stay in your ARM as it makes sense. The problem is, as you eluded to in your comment, is the “fear factor”.
People want peace of mind to settle their fears, showing irrational thought, and they don’t care about the cost (“damn the savings”). Of course if people thought and acted rationally (and in their best interests), they likely would have Option ARMs these days, but that is for another post(?).
Don’t get me wrong, there are valid reasons to refinance from an ARM to a fixed right now, but my point is to think things through and don’t get pressured into it. The second point is look for someone who is willing to tell you to wait, even though they don’t get paid. Too many “practitioners” need money right and will sell their clients into anything, even if it isn’t in the client’s best interest.
Shailes Ghimire
February 6, 2008 at 10:12 am
Robert,
The practitioners needing money is a great motivator. I’m working with a few borrowers who should NOT refinance. There is NO reason at all – but they keep calling me saying that their other LO can do it. The problem is I never said they couldn’t do it – its just that they SHOULDN’T do it. So, that is the predicament I’m in. Irrational, yes.
Benn Rosales
February 6, 2008 at 10:36 am
two things are happening Shailesh:
1)they know they can do it
2)but they don’t really understand why they shouldn’t when everything around them says they should-media, friends, other lenders who want to loan no matter what.
so I think I would go back to the why, but the truth is they’re going to do what they’re going to do with or without you, do the shouldn’ts out weigh the shoulds is the real question
Robert D. Ashby
February 6, 2008 at 5:18 pm
It is at times like those you describe when I wish I could hit somebody with a 2×4 through the Internet or phone and get them to wake up and see reality. The question I always ask myself is “can I live with myself after doing the transaction”? It causes me to walk away from some deals, but I can still sleep at night. In this case, I may still do the deal knowing I tried my best, but at least if I do it they will get a good deal and minimize their mistake.