ARM Rate Increase
The initial rate for an ARM mortgage is fixed for an introductory period ranging from 1 month to 10 or more years. Most Adjustable Rate Mortgages have a fixed, or "teaser" period of 2 or 3 years (2/28 or 3/27 are the industry terms for these ARM loans).
After the ARMs introductory period expires, the rate on your ARM may increase. If you took out your ARM mortgage in the past 5 years, you can safely assume that your new adjustable rate will increase dramatically immediately at the end of the 2 or 3 year fixed period. On some ARM loans, the increase to the new adjustable rate may cause your payment to as much as double.
When refinancing before the Rate Increases on your ARM / Adjustable Rate Mortgage, it may worthwhile for you to evaluate your options, for example obtaining a mortgage with flexible minimum and/or interest only payments, or consider taking cash out of the property to separate it from the equity or consolidate debt.
When evaluating your adjustable rate mortgage during an adjustment period review the following loan documents: NOTE and RIDER.
Your NOTE will outline the terms of your mortgage. It will indicate your rate and the terms of your loan. If you have an adjustable rate mortgage your loan documents will have an adjustable rate mortgage RIDER. This rider will outline the index, the margin, and the terms of the adjustment.
ARM’s have limits, or caps, on the number of percentage points it can go up each year. It also has caps on how much it can go up for the life of the loan. This happens according to the terms of the loan you choose. For example- your mortgage starts at a rate of 4%. If you have a yearly cap of 2 points, and a life long cap of 6 points, this is what can happen to the percentage rate of your loan. At the end of one year your mortgage company can increase your rate by two points, to 6%. At the end of the second year, your mortgage company can increase your rate by 2 points, to 8%. (A total of 4 percentage points higher than the original term of the loan.) At the end of the third year, your mortgage company can increase your rate by 2 points, to 10%. A total of 6 percentage points higher than the original terms of the loan.) At this point you have had an increase of 6 percentage points and can no longer have your interest rate raised for the life of your loan. Of course these changes are tied to the index that your ARM is based on.
Even if you are months away from your current ARM's first adjustment, now might be a good time to contact a mortgage professional to begin planning your next step and evaluating your options. Putting a plan in place before your mortgage adjusts could result in substantial savings.
If you are thinking about contacting a mortgage professional regarding refinancing into a fixed rate program, it is best to do so at least two months before your mortgage is scheduled to adjust. Even if your particular ARM program came with a pre-payment penalty, your mortgage professional can schedule your refinance in such a way that you will avoid this penalty.
If you are not sure you can afford your mortgage payment after the rate increases, call your local mortgage broker today to discuss your options while you still have some!
If your Adjustable Rate ARM mortgage is about to reach the end of its fixed period, you may be able to avoid paying substantially higher mortgage payments by refinancing your Adjustable Rate Mortgage and converting to a Fixed Rate Mortgage. A Fixed Rate Refinance is a very popular option, and if you have equity in your home you may be able to refinance into a secure fixed rate with little to no out of pocket cost.
It is important to ask your mortgage professional what your "fully indexed" rate is as of your time of application. This will give you a general idea of what your rate can adjust to when your fixed period lapses. This does not take into consideration future market movement.
Just how much your Adjustable Rate ARM mortgage's rate and payment may increase at the end of the introductory fixed period depends largely on the "caps" which were stipulated in your loan documents. These may or may not match the figures disclosed in the Truth in Lending disclosures you received in connection with your mortgage.
Many ARM Adjustable Rate Mortgage home loans written over the past 5 year were written with 6/2/6 caps, meaning that at the first adjustment period (the very next month after the fixed rate introductory period on your loan ends), your ARM's adjustable mortgage rate may increase by as much as 6%. For many borrowers who took out ARM loans with low 5% and 6% "teaser" interest rates, a 6% adjustment could mean a doubling of their mortgage payment, or more.
ARM loans can be a strong investment tool to help provide you with a low interest rate and a low payment for a specific period of time. If your ARM is about to make its first adjustment you have a few choices. Choice 1, you can choose to do nothing and you will most likely see an increase of anywhere from 1-2 percent in your interest rate and your payment will increase accordingly. This is most likely going to be the worst option. Choice 2, you can look into refinancing and you can obtain a fixed rate mortgage so that you don't have to worry about the interest rate ever adjusting on you again. Choice 3, you could look into refinancing you mortgage into another adjustable rate mortgage so that you can keep your interest rate and your mortgage payment relatively low and under most circumstances, lower than a fixed rate mortgage. Therefore, discuss your financial goals and your future plans with your mortgage professional thoroughly so that together you can make sure that you obtain the best mortgage for your specific situation.
The best thing for you to do as a home owner with an ARM is to talk to a mortgage professional about your situation. A mortgage professional will be able to guide you in the right direction and offer solutions for your situation. If you would like to speak with me directly about your ARM mortgage please call me at 415-617-5448.
The "Fully Indexed Rate" of an ARM is composed of the addition of 2 components, the INDEX and MARGIN. The Index is the fluctuating component of the ARM which varies depending on certain economic conditions. The most volatile index is the LIBOR. The MARGIN is fixed throughout the life of the ARM. Talk to your mortgage professional to determine which Index is right for you.
Adjustable Rate Mortgages (ARM) often have initial interest rates lower than that of Fixed Rate Mortgages (FRM). This is due to the fact the homeowners with ARM's are taking on some of the future interest rate fluctuation risks.