|
What To Do If Your ARM Is About To
Adjust
Two or three
years ago at the height of the housing boom it seemed like just about
everyone wanted to get into the red-hot market. Unfortunately, some
buyers may have literally mortgaged their future to buy a home during
that time. Many borrowers took out adjustable-rate loans with low
introductory rates for the first few years—and now those rates may be
adjusting upwards. According to many financial analysts, a record number
of adjustable-rate mortgages will adjust this fall and some borrowers
may see increases of up to 35 percent.
If you’re in
this situation, your best bet is to refinance into a more affordable
fixed-rate loan. Now is the time to get a fixed-rate mortgage because
interest rates are stable, the rate
differential between fixed-rate loans and ARM’s is minimal, and
fixed-rate mortgages can give you peace of mind with a set payment every
month.
Currently, the
interest rate on a standard 30-year fixed-rate mortgage is holding
steady in the 6.3-6.5 percent range. Fortunately, the days of
every-other-month increases in the prime rate are a thing of the past.
By refinancing your ARM into a fixed-rate loan you’ll be able to take
advantage of these stable rates. Even if rates don’t go up in the
future, you’ll still be locked in at a decent rate. As they say, it’s
much better to be safe than sorry.
A few years
back, fixed-rate loans used to be at a much higher rate than adjustable
loans, but not anymore; the gap in rates is much less today than it was.
For example, five years ago you would have paid approximately $350 more
per month on a 30-year fixed-rate mortgage (on a $300,000 loan) than you
would have for a five-year ARM. Nowadays, you may pay as little as $50
more for the same fixed-rate loan. Of course, your actual rate will vary
depending on a number of factors, but the fact remains that the rate
differential between the two loans is not as great as it once was.
Finally, it
makes sense to get a fixed-rate loan because such a loan eliminates the
“worry factor” and allows you to have a set payment each month. If
you’re worried now about current your ARM adjusting in the next
few months, you’re still going to be worried about how much you
have to pay each and every time your ARM adjusts in the future. Also, by
having a set payment amount each month with a fixed-rate mortgage,
you’ll be able to budget your finances much easier from month to month
and year to year.
As with any type of loan, you’ll need to do the math to see if
refinancing to a fixed-rate loan makes sense for you financially. If a
fixed-rate loan does make sense for you, you may be able to avoid
mortgage “sticker shock” and avoid what could be a 35 percent increase
in your monthly payments.
∆
[Fixed-rate loan vs. ARM
example from BankRate.com] |
