When and When Not to Refinance

In order to take advantage of stabilized payments and/or lowered costs, it would be worthwhile for borrowers with adjustable rate mortgages to refinance into fixed rate mortgages.

There are four factors which should contribute to the decision-making process:

1. What is the current rate of the Adjustable Rate Mortgage(ARM)?
2. When is the next Adjustable Rate Mortgage(ARM) adjustment period?
3. What is the Adjustable Rate Mortgage(ARM)'s fully-indexed rate?
4. What are the rate and terms of the available Fixed Rate Mortgages?

It is important to fully understand all four of these factors, though many borrowers tend to only know the current rate and period of adjustment. The most current available value of the interest rate index that is used by the Adjustable Rate Mortgage along with the margin, is known as the Fully-Indexed Rate(FIR). Both the index and the margin are shown in the note, but the current index value has to be looked up separately.

What makes the Fully-Indexed Rate important is the fact that is can predict how your Adjustable Rate Mortgage will change better than anything else can. This is because at the next adjustment date, your Adjustable Rate Mortgage will reset, equaling the index value at that time added to the margin amount. Though seldom relevant, it is important to know that there is a limit on the size of a rate change, a number which can also be found in the note. If there is no change between the most recent and next adjustment dates, the Adjustable Rate Mortgage rate during the next adjustment will be equal to the most recent Fully-Indexed Rate.

There are four indexes which impact this generalization: Cost of Funds Index(COFI), Cost of Savings Index(COSI), Certificate of Deposit(CODI) and Twelve-Month Treasury Average(MTA). These indexes slow the market, meaning that the best way to estimate what they will be when your Adjustable Rate Mortgage rate is adjusted, is to project their value twelve months ahead rather than looking at their current value.