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Why I said “Cheerio” to my ARM

December 29, 2015 By Doug Francis

bank of england

Instagram Photo by peppyhere – London

For years clients have asked me about refinancing their mortgages, or called to tell me their great new rate.

But, when the conversation turned to what my interest rate, they were typically amazed that my rate was below 3%.

So, how did I get that rate?

For the past decade I have used an ARM on my house in Vienna. Yes, an Adjustable Rate Mortgage. Most people tend to shy away from ARMs since the rate can adjust every year, but it made financial sense to stay with it since the 1-year Libor rate that it was tied to trended downward for six years.

My mortgage was fixed for 5 years, and then used a calculation each March based on the 1-Year Libor Rate published in the Wall Street Journal. The new rate would then add 2.25% to determine my rate for the year.

The 1-Year Libor

Let’s look at the chart over the last ten years:

refinance Libor arm

Libor is the London Interbank Offered Rate. Yes, London England. “Pip, pip, Cheerio Ol’ Chap!” This ten year chart shows how volatile the rate can be often the adjustments can over only a few months.

See how the chart shows how Libor essentially dropped like a stone in late 2008 and early 2009 when the Federal Reserve dropped their short-term rate in an attempt to stimulate the economy. And as a result, my mortgage rate has stayed around 3% for years.

Time to say Cheerio!

Unfortunately, short term rates have been increasing over the last six months, and I have been watching the 1-year Libor closely thinking about making the switch. And ultimately, the obviously smart decision was to refinance my Libor ARM mortgage.

A year ago the 1-year Libor was .56%, and last week the 1-year Libor was at 1.15% and heading up. (check it now at BankRate)

Long-term rates have remained steady, and I have decided to lock into a new 30-year fixed rate at 3.875% with the same lender.

This maneuver does extend the length of my mortgage, but I have always subscribed to the financial concept that long-term mortgages at super-low rates make financial sense. Since money sitting in your house as home equity isn’t gaining against inflation, it is best to leverage that money and place it where it can grow such as in an IRA in the Equity Index 500 Fund at T. Rowe Price. Your IRA would have had an impressive average total return of 12%.

My point is that money stuck in your house would have lost value thanks to inflation.

If you have an mortgage tied to the 1-year Libor then it is smart to consider refinancing your house too. Start with your current lender.

So, Cheerio Libor old pal… and hello fixed rate!

Filed Under: Blog, Refinance Tagged With: real estate, Refinance

About Doug Francis

A Realtor specializing in unique and new homes around Vienna, Virginia, Doug started writing a first-hand blog about his everyday real estate experiences a decade ago. In-depth, helpful and fun has always been the objective. Outside real estate, he was profiled in a commercial for Verisign's "Where the World Clicks" global ad campaign, and was quoted in Money Magazine's Best Places to Live article on Vienna (#3!). He's a Boston University graduate who feels morning coffee is non-negotiable.

Vienna real estate agent Doug Francis

When we bought our house, we were thinking about raising the kids, updating, and building an addition. With our kids now out of college, our plans are looking at our next phase, especially after seeing friends move away and adjust their lifestyles.

So, what’s next after 25 years? It’s a conversation lots of my clients are having with me as they plan to move to the beach, travel, or move closer to grandkids. Helping them see their future, sell their current home, and move ahead to their new plan has been an interesting new chapter.

My background… I am an active licensed agent in Virginia, work at TTR Sotheby’s International Realty in McLean, and sell homes in all price ranges. I donate to the Town of Vienna tree replacement fund, participate in a neighborhood citizens association, and try my best to stay in shape.

Let me help you too: Email doug@dougfrancis.com or call me at (703) 304-6827 to discuss your plans. Cheers!

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MCLEAN, VA
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$2,499,000
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  • Lot Size
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  • Beds
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About Doug Francis

I am a Realtor with TTR Sotheby's International Realty® just outside Washington D.C. in Northern Virginia. I have been a full-time Realtor licensed in Virginia since 1991, and cover a big territory specializing in the Vienna real estate market and custom homes for sale.

I have unique knowledge of digital real estate marketing, and my marketing starts here. My clients have been attracted to my results-oriented strategy for years, and I am accepting new clients for Fall 2023 right now.

Thanks for reading, and feel free to contact me at 703-304-6827 or email me at doug@dougfrancis.com anytime!

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