Your wealth management strategy shouldn’t just focus on investments. It’s also important to make sure your liabilities are working as hard as possible to support your financial goals.

Periodically reviewing your loan portfolio with your advisor is a key part of that effort, especially if you have an adjustable rate mortgage (ARM).

Assessing an ARM before its rate resets can help to identify ways to improve your future financial position. That’s particularly true when interest rates are rising or expected to rise in the future, because higher rates can lead to higher interest payments. Favorable market conditions, including higher real estate values, may also present an opportunity to improve the structure of your loan. The Federal Reserve dropped its target interest rate to a historically low rate at 0% to 0.25% in response to the COVID-19 pandemic during March 2020. As a result of the current economic conditions, mortgage rates also remain near historic lows and locking in today’s low rates for a longer period of time may help you avoid the impact of future rate increases.

Rising rates aren’t the only reason to consider refinancing. As your life changes, so may your plans for how long you will stay in your home. The key is to align the tenor of the fixed period of the mortgage to the length of time you’ll need the proceeds. For example, if you’re sending a child off to college in the near future, you may plan to downsize as well. In that case, a loan with a shorter fixed period makes sense. On the other hand, if a child decides to delay college or move back into your house after graduation, it may make sense to look for a product with a longer fixed period.

Rates Are Still at Historic Lows

To this point, average jumbo mortgage rates have remained historically low currently resting at the lowest levels since 2015. However, a rising rate environment could reverse that trend. And if your ARM resets after rates climb, you could end up paying substantially more in interest.

To see if a refinance is worth it, compare the total long-term cost of the refinanced loan with the cost of your current mortgage. Consider scenario 1 below of a $1MM 5/1 ARM, three years through its fixed period. A borrower who refinances that mortgage to a $1MM 7/1 ARM today assuming the same rate, may be able to save over $49,000 throughout the fixed-rate portion of the new loan.[1] Your PNC Banking Advisor can assist in calculating the breakeven period for recouping closing costs and the net worth impact for various product structures and rates. You may be able to further lower your rate through our Jumbo Mortgage Relationship Pricing program if you hold aggregate deposit and investment management assets of at least $500,000 with PNC Wealth Management or Hawthorn.[2]

Table 1: Scenario 1

    Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
 

Rate

3.125%

3.125%

3.125%

3.125%

3.125%

5.125%

5.125%

5.125%

5.125%

5.125%

Original* Mortgage Payment

$4,283.75

$4,283.75

$4,283.75

$4,283.75

$4,283.75

$5,274.26

$5,274.26

$5,274.26

$5,274.26

$5,274.26

          Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
  Rate      

3.125%

3.125%

3.125%

3.125%

3.125%

3.125%

3.125%

Refinanced** Mortgage Payment      

$4,283.75

$4,283.75

$4,283.75

$4,283.75

$4,283.75

$4,283.75

$4,283.75

Annual Savings/Costs         $0.00 $0.00 $11,886.01 $11,886.01 $11,886.01 $11,886.01 $11,886.01
Closing Costs         ($10,000.00)            
Cumulative Savings/Costs         ($10,000.00) ($10,000.00) $1,886.01 $13,772.03 $25,658.04 $37,544.05 $49,430.07

*The “original mortgage” example assumes a $1MM 5/1 ARM originated at 3.125% with no points. The adjustable rate cap structure is 5/2/5, meaning the interest rate can adjust by a maximum of 5% at the initial rate reset after the 5 year fixed period, a maximum of 2% annually, and a maximum of 5% over the life of the loan. To provide a more realistic scenario based on expected interest rates, this example assumes 1 year LIBOR will be at 2.625% in 2023, or “Year 6” in the chart above. A margin of 2.5% is added to the 1 year LIBOR rate, resulting in a new interest rate of 5.125% in “Year 6”. This example assumes market rates will be generally flat through “Year 10”, however, rates can change at any time. 

**The “refinanced mortgage” example assumes the refinance of the original $1MM balance using a 7/1 ARM @ 3.125% with 5/2/5 rate cap structure and no points. The example also assumes approx. $10,000 in closing costs (vary by geography, loan size and terms).

The Argument Against Waiting

It may be best to refinance before mortgage rates rise. If you wait to refinance until rates have jumped, you might miss your chance to lock in today’s low rates. 

Of course, identifying the best way to take advantage of a refinance depends on your unique situation—how long you’re planning to stay in your home, your overall tax situation and your financial goals. 

Your PNC Banking Advisor can help you determine the best way to align your home financing with your goals and objectives.