In August 2015 I penned an article in this publication warning of the coming frost and more specifically the impending increase in interest rates. Just as timing the coming of the White Walkers is not possible but we know it is inevitable, we could not accurately predict the timing of the current move in rates.
If you currently have a fixed-rate loan under 4 percent, and no Heloc, this article is about as relevant to you as the impending winter is to the citizens of Dorn. It is intended for those with Adjustable Rate Mortgages (ARMS) or Home Equity Lines of Credit (Heloc), which float with changes of interest rates.
Since the election we have seen the Ten Year Treasury, one of the more common factors used in determining mortgage rates, increase almost every day. The day before the election, the rate was 1.83 percent. The day after, it had jumped to 2.07 percent and on Friday, November 18, it closed at 2.34 percent, an increase of 1/2 percent in less than two weeks.
ARMS: Consider a new fixed-rate mortgage.
Many of you have ARMS with rates adjusting in the next few years. With the expected increase in the short-term rates that impact ARMS, you are likely going to experience a non-protected new adjustable rate that is higher than a new 30-year fixed rate could be. I use the term nonprotected because your rate can increase again 12 months later as your ARM probably is subject to change every year.
ARMS: Consider a new 7- or 10-year ARM.
Perhaps you plan to move soon or you don’t believe rates are moving higher, but your current rate is resetting soon. You may want to consider a new ARM to get more years of protection without increasing your rate. A reduction in interest rate isn’t the only reason to refinance. Knowing that your rate is set for 7 or 10 years is also a benefit and a legitimate reason to refinance.
HELOC: Consider combining your first mortgage and existing Heloc into a new loan and lock in the Heloc debt.
The rationale is similar to that for an existing ARM, to convert an adjustable-rate loan into a fixed rate. This is arguably even more important for a Heloc, which has no fixed period of time and will change with each increase by the Federal Reserve. In fact, you are probably already paying a higher rate than what is available for a 30-year loan if you secured your Heloc more than a year ago.
While deciding to change from an ARM to a new first mortgage may be an easy decision, changing your Heloc may be a little more complicated if you have an existing first mortgage. The preferred transaction would likely be to combine the two mortgages. In the recent past we were able to reduce the rate on the first mortgage and roll in the second, locking those funds at a fixed rate, a win-win. Now, if the rate on your current first mortgage is lower than a new loan will be, it may not make sense to increase the rate on the first mortgage just to lock in the second mortgage. Obviously it will depend on the amount of the increase in rate and the amount of the two loans. Regardless, now is the time to explore your options before rates go higher.
HELOC: Consider a new HELOC with a 12-month introductory rate.
Many banks offer an introductory rate for one year. If you are past that first year, and you can’t roll the Heloc into a new first mortgage, at least consider getting the new introductory rate for one year. The negative to this is you may have a waiting period where fees will be charged if you close the new Heloc. If you are presently using the funds and you expect to leave the line open for that period of time (normally three to four years) it may be worth trading the holding period for the reduced rate for a year.
In summary, if you had an ARM these last 10 years you have benefited from decreasing rates and you deserve congratulations for your foresight. However, it’s Thanksgiving and winter is coming and. in fact, it appears the impact has already begun. We have likely seen the bottom of the interest-rate cycle and must now plan for a period of increasing rates. Regardless of the possibility for tremendous growth and prosperity that hopefully accompanies the reign of our new leader, we will see an increase in interest rates and we should plan accordingly.
By David Siegel
David Siegel is a Home Loan Officer with Citibank in its Englewood branch. David can be reached at [email protected] or 201-419-1330. NMLS #277243
