Do ARMs stay competitive in their adjustment period?

Question

I have been getting into a few portfolio lent ARMs lately(maxed out on fixed rates) and I'm wondering, do ARMs keep their interest rates at market competitive rates? They wouldn't just cap it out right away at the adjustment period because I'll just refi with a competitor?

Jesse Gonzalez · Answer

Typically you'll see the adjustments capped if that's what you're asking.  One portfolio lender I work with has the adjustment caps as follows, 2/2/6.  This means the rate can adjust the first time no more than 2%, it can then adjust 2% at each adjustment period thereafter, and adjust up to a maximum of 6% over the start over the entirety of the loan life.  You're question is hard to answer really, the margin you agree to take up front will determine whether or not your adjusted rate is "competitive" with the market.  If you take the highest margin up front in order to get your loan costs lower than taking a lower margin then you'll most likely not be competetive with the market and then it's up to you to decide if you want to go through the refinance process again.  To go into an ARM assuming that you'll be able to refinance at the adjustment period is a risky proposition in my opinion, but if that's your only alternative because you're maxed on fixed rates then I'd say its a good risk to take.  Just my two cents.