Actually, the refinance boom is over; however, there are a fair amount of people that still need to refinance. The problem is that the people that have not refinanced when rates were low simply don’t realize that they should still refinance. The people that obviously needed to refinance have already refinanced, in some cases multiple times. There are many people left that can refinance. For example, a lot of people took out 3, 5, and 7 Year ARMs. When the initial fixed rate period was over, they watched their rate adjustments fall year after year. Now rates are seemingly on the rise, and the consensus is that they will continue to do so.
If you had a 3.5% 5-Year ARM, and then it adjusted down to 3.25% in year 6 and then down to 2.75% in year 7, you enjoyed such a good ride, you feel you should never let go of your ARM now. Your ARM loan has treated you well, why would you change it? The next 5 years of interest rates won’t look like the last 5 years, and we have already seen an approximate 1% rate increase from the bottom of the last rate cycle.
If you are going to be in your home for at least the next 2-3 years, or are considering keeping your current home as a rental property, you should be looking to refinance and lock in a low fixed rate today. Even though rates are approximately 1% above the bottom we saw last year, refinancing to avoid the potential future rate increases that may be coming is a good idea. If you have an ARM loan that is now adjusting annually or is about to start adjusting soon, with most ARMs having a 2% per year cap, you could see steep increases.
Many ARM loans are based on the LIBOR index (London Interbank Offered Rate), which currently stands at 0.58%. If you Google “LIBOR interest rate adjustment chart” you can find your own results to see how LIBOR has adjusted over time, or go to a chart of historical LIBOR rates by clicking here. Just four years ago in January 2009 the LIBOR rate stood at 1.9%, January 2008 it was 3.4%, and January of 2007 was 5.4%!
You can see how fast it can move, which means the average person will not see the rise coming, and it will be over before it starts. By the time a mortgage holder sees a 5% LIBOR rate, fixed rates will likely be in the 6’s or 7’s, or higher. Then all the ARM holders who have had quite a party over the last 5 years will be complaining about their rate increases, but this can be avoided!
Although current fixed rates may seem high (in the mid to upper 4’s for a 30 year fixed rate or the mid to upper 3’s for a 15 year fixed rate) when compared to a year ago, if you plan to stay in the house long enough and are on an ARM loan, current fixed rates may seem like a bargain compared to the future. If you think you will sell your home in the next year or two, then don’t refinance. You won’t recoup the closing costs through the monthly savings. If you are going to be in your home longer than 2 years, at the very least, refinancing would be like taking out an insurance policy. At best, it may save you a substantial sum of money over time.