Why Homeowners With Adjusting Adjustable Rate Mortgages May Be In For A Surprise

By eSave Mortgage | October 15, 2008

For homeowners with soon-to-adjust adjustable rate mortgages, the recent banking turmoil worldwide may lead to budgetary pain.

This is because most conforming ARMs made since 2003 are based on a borrowing cost called LIBOR and LIBOR is up an uncharacteristic 2 percent since September.

LIBOR stands for London Interbank Offered Rate and is the rate at which banks lend money to each other.

Historically, LIBOR has tracked the U.S. treasury market, plus a half-percent increase. This suggests that banks are only slightly less likely to default versus the U.S. government.

Today, that spread is close to 4.5 percent.

Since Lehman Brothers failed in September 2008, banks are fearful that their peers will meet a similar fate. Looking at the chart, we can see how LIBOR has responded.

The LIBOR spike is harming homeowners with adjustable-rate mortgages because adjusted rates on conforming mortgages are often calculated by adding 2.250 percent to the current 12-month LIBOR rate.

On sub-prime mortgages, the adjustments are even more steep.

In general, though, as LIBOR rises, household payments rise, too, so if your home loan is adjustable and is due to reset soon, call or email your loan officer to talk about how LIBOR may impact your adjusted mortgage rate and payment.

For many homeowners, it’s less expensive to refinance into a new home loan that to just let the adjustment happen.