You and Your Adjustable Rate Mortgage

Aug 13th, 2007 @ 10:05 AM by MortgageMentor

If you happen to be one of the millions of Americans who refinanced their homes over the past 5 years there is a good chance that you chose an adjustable rate mortgage for your home financing needs. Who could blame you? With historically low rates these short-term loans offered monthly payments that were hundreds of dollars cheaper than their fixed rate counterparts. However, with the recent shift in the mortgage market it is important that you and your adjustable rate mortgage become familiar with each other to ensure that the mortgage that saved you money doesn’t end up costing you your home.

Things to do if you have an adjustable rate mortgage:

1. Find the note that you signed when you refinanced or purchased your new home. Dust it off and look for the pages titled “Adjustable Rate Note Rider” or similar. These pages will contain the essential details about your mortgage.
2. Look for the “First Rate Change Date” or “First Payment Change Date” this is the date that the fixed-rate portion of your mortgage will expire and is the beginning of your adjustable period.
3. Identify the “Limits on Interest Rate Changes” section of the document. This the section that tells you the maximum amount that your interest rate can change at the adjustment period.
4. Take that interest rate number and calculate your new monthly payment at that interest rate. That is most likely your new monthly payment once your mortgage adjusts.

You might say, “Morgan – my rate won’t be at the maximum during the first change,” and you could be right; however, with the rising rate environment that we are currently in and the way your loan is structured it most likely will be at or near the maximum interest rate upon adjustment. Use this as a worst-case scenario to help you plan for the necessary changes you’ll need to make when your loan adjusts.

If the payment looks overwhelming:

You are not alone. Very few people can afford to watch their mortgage interest rate jump 2% or more and still make the monthly payments on the loan. If this sounds like you after the above exercise it is important to pick up the phone now and examine the options you have. Here are some common options available to you:

1. Refinance the loan. This is the best option. Refinance in to a longer-term mortgage such as a 5, 7, 10 or 30 year loan. This will allow you to fix your payments at an affordable level for the foreseeable future.
2. Sell the home. If you are certain that you cannot make the mortgage payments when your loan adjusts and you are unable to refinance the home in to a lower payment it may be in your best interests to attempt to sell the home to protect your credit and avoid a potential foreclosure.
3. Loan Modification. If you are certain that you will be unable to make the loan payment after your loan adjusts you may consider contacting the lender and requesting a loan modification. A modification may allow you to obtain terms similar to your existing loan for a longer fixed period of time.

If you feel pinched by your upcoming ARM reset the best thing to do is to take action early. By being proactive about the change you give yourself the best opportunity to successfully transition out of your loan and in to a more stable financing situation.