refinance
Farewell to ARMs Many refinance adjustable-rate mortgages |
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DETROIT — Brian and Lisa Wilcock looked at mortgage
interest rates four years ago, did the math and came up with a refinance plan |
Because they intended to move in three years, they'd refinance their 30-year
fixed-rate mortgage into a three-year adjustable-rate mortgage (ARM) at a lower
interest rate and save hundreds of dollars a month.
It worked — for a while.
The lower rate shaved $375 off the mortgage payment on their Rochester Hills,
Mich., home. But four years later, they're still in their three-bedroom,
split-level house and have no plans to move. Their introductory rate of 4.37
percent reset last year, with a 1.25 percent cap that spared them the full brunt
of the interest rate increase.
But that's set to expire in April when the ARM resets to a rate that will likely
be above 6 percent.
"It's pretty much no-holds-barred and it gets painful from there,"
said Brian Wilcock, 38, of his mortgage's interest rate, which will climb yearly
if he doesn't refinance. Wilcock thought the family might have to relocate due
to his sales job.
For the Wilcocks and other homeowners, those low three- or five-year teaser
rates on ARMs are adjusting higher this year, and homeowners will feel the
difference in their wallets.
Mortgage experts estimate that approximately $1.5 trillion worth of adjustable
mortgages will reset by the end of 2007. Forecasts call for $600 billion to $700
billion of those loans to be refinanced into new loans, including fixed-rate
mortgages.
Locally, lenders report an anecdotal upswing in clients refinancing into 30-year
fixed-rate mortgages. Last year, ARMs represented 30 percent of all mortgages,
according to the national Mortgage Brokers Association. By 2008, the group
estimates, the number will drop to 18 percent.
"We definitely want to get in to something more secure," said Lisa
Wilcock, 35, a part-time nurse and mother of two. The couple is mortgage
shopping for 30-year fixed rates. "We don't want it to keep rising and
rising and rising."
Just five years ago, adjustable-rate mortgages carried interest rates so low
they allowed homeowners like the Wilcocks to lower their monthly mortgage
payments by hundreds of dollars. First-time home buyers flocked to the loans as
well, since they allowed often cash-strapped first timers to afford a larger
house.
"There are more people now than ever with adjustable-rate mortgages,"
said Greg McBride, senior financial analyst at Bankrate.com. "The problem
— and you could see this coming a mile away — is that interest rates have
increased and those same borrowers are coming up for a rate increase."
If a homeowner in 2004 got a three-year ARM at 4 percent on a $250,000 loan, the
monthly mortgage payment was $1,150. That payment today would increase to $1,500
monthly, lenders said. And figured at an interest rate of 7.5 percent, the
payment would increase $509 more per month.
"That's called payment shock," said Ron Cockle, who manages Michigan,
Wisconsin and Iowa as a regional manager for Wells Fargo Home Mortgage.
The good news is that the shock may be bearable for many. The MBA estimates that
up to $800 billion of the loans will simply reset, with owners making their new
payments. Interest rates are currently hovering around 6.25 percent and most
experts expect them to stay under 7 percent this year.
If a homeowner decides not to refinance, the interest rate will rise at a capped
percentage determined by the lender at closing. Typically the cap is 2 percent
to 5 percent. And since an ARM can't adjust above the current market rate,
"Nobody's going to 9 percent, no matter what your cap is," said Ken
Mascia, president of the Oxford Financial Corporation in Birmingham, Mich.
Mortgage experts said ARMs still work for some buyers, especially those who
expect their incomes to rise or those planning to live in their homes for fewer
than five years.
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