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November 21, 2008

The Option ARM Non-Bomb?

I just had someone email me something interesting today about their adjustable-rate mortgage resetting –- but to considerably lower levels. How widespread is this phenomenon? Or, asked differently, what percentage of ARMs are tied to Treasuries, as opposed to Libor, etc.? I’d love to see some data.

Here is the relevant part of the email (in anonymized form):

My seven-year ARM came up for reset this month, which I had been dreading, figuring that by putting off my refi I'd exposed myself to bad craziness in this market. Would I not be able to refi? Would I have to accept 8% or worse? The loan was 6.25 percent at origination, with a 2% annual cap on adjustments. I'd not refid at the bottom [for personal reasons].

Quite the opposite happened. My rate went down 2 points to 4.25%. It would have gone to 4 but for the 2 pct annual cap, which works in both directions. (I had only ever thought of it as a protection for me in the other direction). The net impact on my budget was $312 monthly, before tax effects. Which could let me do salutary consumption like buying a car, or adding some bedroom furniture, without the slightest impact on my budget. Or just dump it into a 529 plan. Between that and the falling price of gas, it's a pretty huge impact.

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