If you have an adjustable rate mortgage (ARM), chances are you were thinking of selling your home before the ARM adjusted. Take comfort in the fact that many people have done the same thing.
If your plans have changed and you’ve decided not to sell, it’s important to understand what will happen to your ARM and what steps you should take.
ARMS can be vital budget-savers since interest rates on ARMs are lower than fixed-rate loans. However, at the end of the ARM’s fixed period – the time during which the interest rate will remain unchanged – your monthly payment will adjust. For example, the interest rate on a 5/1 ARM will be fixed for the initial five-year time period. Over the next 25 years, it will adjust to a base rate (referred to as a margin) plus the current level of a certain index to which then loan is tied. In addition, of course, your payment will adjust, too. During the initial five-year period the payment is calculated using the initial rate and a 30-year amortization. After that, the payment is figured using the margin plus the index rate and a 25-year amortization.
So, what should you do if your ARM is about the be adjusted?
Most people consider – and should – refinancing their mortgage. With rates consistently low in recent years, and as the economic growth and recovery continues, rates have more risk of rising. Here’s the reasoning: if you chose a new 5/1 ARM today, it’s relatively safe to assume that the interest rate and payment would probably go up when the five years were over. At least by refinancing at a slightly higher fixed-rate today – you’d have the peace of mind knowing that your rate and monthly payment won’t change for the life of the loan.
As always, if you have questions about the best mortgage options for you and your family, call us at ALCOVA Mortgage today. We can meet with you to determine a course of action that will best suit your needs.
Call us today… we’re here to help.