Q: I have an adjustable rate mortgage (ARM) that I would like to keep at the current rate without refinancing. Is it possible to do this?
A: If you have a conventional adjustable rate mortgage (ARM), your loan documentation in your loan refinance for the ARM will specify your ability to fix the interest rate during the term of your loan.
Most adjustable rate mortgages obtained during the last five years generally fell within a couple of categories. The first category of ARMs fixed the interest rate for an initial length of time and limited the increases on the rate during the remainder of the loan term.
If you had a 5/1 ARM, the interest would have been fixed for five years and at the beginning of the sixth year the interest would reset to a new rate. That new rate would be based on the one year Treasury interest rate or the one year LIBOR (London Interbank Offered Rate) plus a margin of about 3 percent.
That is to say if the Treasury rate or LIBOR rate was one percent, the new interest rate would be one percent plus 3 percent for a new rate of 4 percent.
Your mortgage documents almost certainly limit how much the new interest rate can change. For example, your interest rate may not be able to fall below a certain threshold, nor can it rise more than 5 or 6 percent above the initial rate. Typically, your ARM cannot go up or down by more than 2 percent each year. But loan terms for adjustable rate mortgages differ from lender to lender.
There were some mortgage loan products offered several years ago that allowed a borrower to lock in an interest rate at or prior to the end of the initial adjustable rate period. If you have one of these loans, you would have to see what rate the loan would lock to. You might not end up with the current rate you have with the lender, but rather the rate set forth by formula in the loan documents.
If your loan doesn’t give you the right to lock your rate, you might be out of luck, especially if your loan is serviced by a national servicer and the loan itself is owned by investors. With those types of loans, the only way you can move from an adjustable rate loan to a fixed rate loan is to refinance your existing ARM mortgage into a fixed rate mortgage. If you decide to refinance your ARM loan, you may need to shop around and find a new lender. That new lender may have a better fixed rate mortgage package suitable to you.
If you’re lucky to have your loan serviced and owned by a local bank or savings and loan, that bank may have a program available to you that might allow you to fix your interest rate without a full blown refinancing. However, most lenders in these current economic times have eliminated some of these plans and now require borrowers to refinance their loans from an ARM (adjustable rate loan) to a fixed rate loan.
Read more about ARM interest rates and how they are calculated.